Archive for the ‘Money and Markets Newsletter’ Category:
Recession Warning Flags Flying Again!
by Mike Larson
 |
The United States emerged from a grueling 18-month recession just two short years ago, according to the business cycle arbiters at the National Bureau of Economic Research. Yet for many Americans, the “recovery” felt like anything but a rebound. And now, it looks like it’s already coming to an end.
Just consider what we’ve learned in the past few days …
* Personal spending went nowhere in May! That missed the forecast for a gain of 0.1 percent, and it was the worst reading in 10 months. Moreover, the gains stemmed from higher prices not strong underlying demand. Inflation-adjusted spending shrank 0.1 percent, the second monthly decline in a row!
* The Dallas Fed’s latest manufacturing gauge imploded! It fell to -17.5 from -7.4. That was the worst reading in 11 months. It’s not an isolated disappointment, either. The New York and Philadelphia indices also tanked, and the overall plunge we’ve seen in these up-to-date manufacturing surveys over the past couple of months is one of the worst on record!
* Housing keeps sinking like a stone! New home sales fell another 2.1 percent in May, while existing home sales dropped 3.8 percent. Home prices, according to S&P/Case-Shiller, dropped 4 percent from a year ago in April. That was the biggest annual drop in 17 months, and it leaves prices at their lowest level since eight summers ago.
* Consumer confidence is tanking! The Conference Board’s consumer confidence index slumped again to 58.5 in June from 61.7 in May. Not only did that miss economist forecasts, it was also the worst reading in seven months.
What might we see next? What are the ramifications for stocks? Bonds? Currencies? Let’s take a look …
Why the Second Recession in as
Many Years May Be Looming
How could we possibly be in this dismal situation? Weren’t we told several times over the past couple of years that brighter times were ahead?
 |
| Neither Bernanke nor Geithner have offered any practical solutions to ease the pain Americans are feeling. |
Sure, we were. By politicians in Washington. And you probably know the old joke: “How can you tell a politician is lying? His lips are moving!”
The fact is, we didn’t lay the groundwork for a healthy recovery. We didn’t allow the debt destruction that had to take place, proceed. Instead, we tried to bail out and backstop everybody and his sister in order to make things less painful. That means that even now, we’re still too buried in debt to fund a healthy, long-lasting rebound.
As The Wall Street Journal reported on Monday …
“The Federal Reserve is just days away from ending one of the major steps to aid the U.S. economy — but the effort has done little to solve the original problem: The government and individuals alike are still heavily in debt.”
The Journal goes on to make the same argument I’ve laid out for you:
“The fundamental problem is that reversing the trend of piling on the debt requires some combination of cutting spending, growing income or the economy, and inflation. But wage growth is stagnant and home prices, which underpin much of the debt problem, are still falling.
“Meanwhile, in a vicious circle, businesses aren’t hiring or investing because they know consumers are tapped out. Banks, for their part, are hoarding cash, being stingy with new loans.”
The amazing thing is that policymakers at the Fed and Treasury don’t seem to understand this fact — even as it’s been obvious to me for the past couple of years! Ben Bernanke himself admitted in his most recent press conference that …
“We don’t have a precise read on why this slower pace of growth is persisting … Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”
That sure is encouraging, eh? It just goes to show you that if you’re counting on the Fed to get things right, good luck! They got the dot-com bubble wrong. They got the housing bubble wrong. And their plan to underwrite an economy recovery has proven to be the wrong medicine for what ails us.
Practical, Real-World Ways
to Protect Your Wealth!
My simple advice: Stop listening to the happy talk coming out of Washington. Take steps immediately to protect your wealth from a looming recession!
One of my favorite vehicles is inverse ETFs — exchange traded funds that rise in value as sectors of the stock market fall. In the first phase of the recession, sectors like real estate and financials got crushed … driving the value of select inverse ETFs through the roof.
If I’m right and sectors like REITs are going to tank again, then the actions I recommended in my June 17 Money and Markets column will pay off handsomely.
You could also consider something like the ProShares UltraShort MSCI Europe (EPV) to hedge yourself against the risk of a meltdown in the PIIGS nations. The only problems with this leveraged ETF, and the many others you can choose from, is timing and pricing.
You need to know when to get in, and when to get back out, because tracking errors between these ETFs and their underlying benchmarks increase with time. You also have to control your risk with tools like profit targets and stop losses.
Until next time,
Mike
Three Often-Overlooked Risks of Inverse ETFs
by Ron Rowland
 |
The ETF revolution allows everyday investors to achieve the impossible. Just a few short years ago, short-selling, leverage, spreads, and commodities were practical only for the Wall Street insiders. Now, with ETFs, anyone can play.
Yet availability doesn’t guarantee success. You have new opportunities, yes, but they all have risks. You need to know what can go wrong and be ready for it — before you place an ETF order.
Lately I’ve received many questions about inverse ETFs, which are designed to go up when the indexes they track go down. With markets volatile, the economy sputtering, and a global debt crisis all over the headlines, now may be a great time to consider trading on the short side.
But inverse ETFs carry some unique risks. And today I’ll talk about three you may not have considered.
Inverse ETF Risk #1:
Bad Timing
This one may go without saying, but I’ll say it anyway. You don’t want to buy an inverse ETF (or make any kind of short sale) unless you are very confident your target market is heading down soon. Timing your entry and exit is critical.
The same is true for bulls, of course, but it’s doubly important on the short side. Markets tend to fall faster than they rise. The downturn can easily be over by the time you notice it and decide to jump aboard with an inverse ETF.
 |
| Inverse ETFs can change directions quickly, so be ready to jump off! |
Even for professionals, differentiating between a temporary drop and the beginning of a bearish trend is tough. And as we’ll see in the next section, time is not always on your side.
Inverse ETF Risk #2:
Holding Too Long
Many inverse ETFs include a built-in leverage factor. The intent is to amplify your gains by 2X or 3X. Sounds great, right? Go 3X short and a 5 percent drop for the market turns into a 15 percent gain for you, right?
Not exactly. In most cases, the leverage factor is reset every day. This means that, over time, the value of your shares can drift down even if the market moves in your favor!
 |
| Leverage can be helpful or dangerous. |
I explained this just last month in What Silver’s Recent Plunge Teaches Us about Leveraged ETFs. And for more details and examples, see my 2009 column Understanding Leveraged ETFs.
The bottom line: Leveraged and inverse ETFs are intended for quick strikes. Get in and get back out as soon as possible. If you make a mistake, admit it. Don’t just sit there and hope for a recovery.
[Editor's note: For clear, concise alerts on when to get into a position — and when to get out — you should check out Ron's International ETF Trader service.]
Inverse ETF Risk #3:
Derivative Exposure
Inverse ETFs employ various techniques to get the correct market exposure. In many cases they include derivatives like futures, options, and swaps.
The main concern in derivatives is “counterparty risk.” These instruments are nothing more than legal agreements in which two parties agree to do specific things in specific circumstances. One party is you — or really the ETF manager, acting on your behalf.
In the case of an inverse ETF, the counterparty agrees to pay your ETF if the selected benchmark goes down. Likewise, the ETF will pay the counterparty if the selected benchmark goes up. Counterparty risk is the possibility the other side won’t make good on their bet.
Most inverse ETFs achieve their desired exposure by holding swaps. And it is important to note here, that swaps typically involve only the gains and losses in an index, not the base value of the index itself.
For example, if an index has a starting value of 100 and moves 2 percent, the swap only covers the 2 percent move (4 percent if it happens to be a 2x fund).
If the counterparty were to default, the ETF might not be able to collect on the 2 percent or 4 percent gain, but it would still have the initial cash representing the original index value of 100. This example is oversimplified of course, but I think you get the idea.
 |
| Counterparty risk is everywhere. |
Counterparty risk isn’t unique to derivatives contracts. When you buy a plane ticket, for instance, you agree to give the airline a certain amount of money. They agree to have a seat available for you on a plane going to your destination at a defined date and time.
If you don’t pay for your ticket, or the plane takes you to the wrong city, then it is a form of “counterparty default.”
Defaults on equity swaps are very rare, but there is always the possibility that it could happen. This is one factor to consider when deciding whether an inverse ETF is what you need.
Every ETF has a prospectus with detailed information on its characteristics, fees, and risks. Always read it before you invest a dime. You can find it on the sponsor’s website. If you don’t understand something, get clarification from a reliable source.
Best wishes,
Ron
Why Obama’s Desperate Move Could Send Oil Prices Soaring!
by Kevin Kerr
Wednesday, June 29, 2011 at 7:30am
 |
The sudden announcement last week that the International Energy Agency (IEA) would release strategic oil supplies onto the world markets caused a significant selloff. And crude oil prices dropped around $9 in about two days.
Mission accomplished? Hardly!
The 60 million barrel release from the Strategic Petroleum Reserve (SPR) is merely a drop in the bucket of global usage, and will likely have the opposite effect on prices longer term. The move is simply more psychological window dressing for the comic theater that is happening in Washington right now. It would be funny, if it wasn’t so sad.
In fact, it’s really a sign of …
Desperate Measures
By releasing supplies from the SPR with crude at around $90, if prices do run up again, the administration will have to fill the SPR back up at a higher price. And as shown in the chart below, a big chunk of that oil will come from outside our borders.
 |
| The Strategic Petroleum Reserve is intended solely for emergencies that threaten the U.S. economy or national security. |
It’s another foolish rob-Peter-to-pay-Paul action by the imploding U.S. government.
The careless action taken by the IEA and President Obama, has now underscored how worried they actually are about global economic growth and tight supplies. So in essence this move could actually stoke the fire to drive prices much higher, much more quickly.
In a recent Bloomberg report, Caroline Bain, of the Economist Intelligence Unit, was quoted as saying:
“Although the immediate impact of the IEA’s reserve release will be to depress prices, in the more medium term, it could actually be bullish for prices. Reserves are finite and cannot be released forever.”
Unlike Uncle Ben’s printing press that never seems to run out of ink, oil supplies are not something the U.S. government can simply print more of.
To put the gravity of the situation in perspective, this is only the third time in the past 50 years that IEA has released strategic reserves. And in order to tap the SPR, President Obama had to authorize it.
Frighteningly, the prior two times resulted in super-spikes. And I think we can expect that record to hit 3-0 very shortly.
It’ll Be Different This Time,
Just Not in a Good Way
Many things are very different this time around that make it even more unlikely this small release of oil will have any measured impact to the downside.
For instance, we don’t have the added supplies of barrels of North Sea Crude to help cushion prices.
Supplies from Norway are falling fast, and Norwegian oil production decline is devastating. The figures from some of the producers are downright scary …
According to reports, production has fallen in the region by more than 20 percent from 1991 levels. Problems have included: Corrosion of old infrastructures combined with a lack of proper investments prior to the merger of Norway’s two largest oil groups, Statoil and Norsk Hydro.
Meanwhile production from Mexico’s oil fields, which the U.S. also has counted on heavily in the past, is also falling drastically. So the likelihood of the SPR release bringing any sustained relief to oil prices and thus consumers, is highly unlikely.
No Real Answers …
Just Fairy Tales!
The recent correction in commodities across the board is a welcome opportunity for those who can step out of the land of unicorns and candy canes for a moment, and see the true disaster that is unfolding before us, especially in the energy sector.
Bloomberg recently quoted a top trader, Michael Cuggino, who helps manage $13.5 billion at Permanent Portfolio Funds in San Francisco:
“I still like the growth story. Commodity prices are going to continue to go higher. Worldwide, the economy continues to grow and monetary policy is going to stay relatively consistent with no changes.”
Amen.
Basically, by wasting valuable years that could have been used for research and development, drilling, and creation of alternatives, the U.S. has set itself up to be dependent on oil supplies from people whose ultimate goal is to destroy us.
A nightmare.
Couple that with the ongoing endless printing of dollars by the Fed and the ever-rising debt ceiling, and you have a recipe for disaster. So what is an investor to do?
Bent Over a Barrel
As investors and consumers we have to choose our own belief in what the reality of the situation in the U.S. is right now. But clearly job losses and lower wages, at the same time as rising food and energy costs, are a very bad combination. Regardless of what some government reports may show.
The national debt just seems to grow and grow and grow, and yet no real answers are being sought on how to change the underlying problems. And the partisan bickering and lack of any true energy policy in the U.S. is the biggest joke of all.
 |
| We need oil — and lots of it — to make everything from bubble gum to shower curtains to bandages. |
The fact of the matter is that when it comes to oil supplies the U.S. is bent over a barrel and not doing anything about it. The days of cheap energy supplies are over. And that translates into higher costs for everything that uses oil or related products. Transportation, manufacturing, industrial, building … you name it. Basically everything.
The bottom line: We all have exposure to higher oil prices, so we must find a way to invest in the rise to offset some of the costs and even profit from the inevitable.
There are many ways to invest in the energy markets … from commodity futures and options to individual energy stocks. But often the volatility and risks of these vehicles can dissuade some investors.
However one of the best ways I know for investing in rising energy prices are key energy ETFs, and ETF options should you want more leverage. Here are two possible opportunities you might consider:
PowerShares DB Oil (DBO): To play energy in the short-term, futures-based ETFs such as DBO are designed to help you accomplish that. While these funds aren’t intended to track the spot price of oil, they’ll often correlate better than equity-based funds.
SPDR S&P Oil & Gas E&P (XOP): Oil companies have been raking in profits hand over fist for the last several years, so it only makes sense that higher oil prices will continue that trend. And with this IEA-inspired pullback we could see those prices surge even more. So XOP, which tracks the performance of the oil and gas exploration and production portion of the S&P Total Market Index, could be a real winner.
There are many more oil-related ETFs to keep your eye on, and you can expect more to come out as this story is just heating up.
Yours for resource profits,
Kevin
Kevin Kerr has successfully traded commodities professionally for the last 22+ years. He a regular contributor to news outlets including CNBC, CNN, FOX News, CBS Evening News, and Nightly Business Report.
Source: Money and Markets
When it’s actually okay to “go naked”
by Nilus Mattive
 |
A few weeks ago, I told you about covered call writing … which is my favorite income-generating options strategy. And in that article, I told you that I absolutely, positively did NOT recommend writing naked calls.
Just as a refresher, the difference between writing a covered call vs. a naked call is simply that in the former case you own the underlying shares you’re writing against whereas a naked call is written without owning the underlying stock.
To understand why writing naked calls is so dangerous, let’s consider a simple example:
XYZ’s stock is trading at $28 a share when you decide to write a call option on it. The option expires two months out, and has a strike price of $35. You sell the contract for $200.
Importantly, you decide not to purchase 100 shares of XYZ nor do you already own them.
A few weeks later, XYZ announces that it’s being acquired by rival ABC for $60!
Now, if you had opted to write a covered call and bought the stock at $28, this wouldn’t be a big deal.
Sure, you’d be kicking yourself as you missed out on roughly $32 a share in upside but that’s the worst thing that would have happened.
Instead, you have literally lost at least $5,800 on your naked call. I say “at least” because there is still additional time left on the contract and the stock could go even higher should a bidding war ensue!
Reason: YOU are responsible for delivering 100 shares of XYZ when the contract is exercised. And that means you have to go out on the open market and buy them at $60 a share. That’s $6,000. Subtract the $200 in premium you collected and you’re down $5,800.
So now you can see why writing naked calls is so dangerous. Your profit is completely capped at the premium you collect while your losses can grow without limit.
Don’t get me wrong. Some people do use this strategy to make money. But they are very adept at writing contracts that will likely expire quickly and without being exercised. Most investors will be best served by avoiding naked call writing altogether.
However, There Is a Different Naked Options Strategy
That I Consider Safe and Effective for Income Generation …
It’s called naked put writing, and it’s like the mirror image of covered call writing. You are basically telling someone that you’d be willing to buy their shares if they fall to a certain level.
The investor buying your “insurance policy” is hedging against potential downside. And as with call writing, you’re collecting a nice premium upfront!
In short, naked put writing is yet another solid way to get income from options trading.
However, the key here is that you must be ready to take ownership of the underlying stock, too!
Like all options contracts, a naked put covers a round lot of stock, or 100 shares.
So let’s say you want to buy 100 shares of XYZ stock, but you think it’s overpriced at today’s level.
Well, instead of placing a good-till-cancelled limit order with your broker — or watching the ticker tape relentlessly for weeks on end — you could write a naked put near your buy price instead.
Then, if the stock falls to that level (or below it), odds are very good that the contract holder will “put” his shares to you. And since you also get to keep the options premium, you’ve actually gotten them a little cheaper than the strike price of the contract!
Alternatively, if the stock doesn’t reach your strike price during the life of the contract, you keep the premium and are free to write another put. Keep pursuing this same strategy and you could really make a lot of money just for waiting around!
There are just a few things to note:
First, you could start off with an immediate paper loss when you take possession of your shares if they’ve fallen below the strike price.
Second, those losses could be substantial if the price implodes.
Third, you must have enough cash in your brokerage account to cover the potential stock purchase under the put contract.
For all these reasons, I consider naked put writing riskier and more aggressive than writing covered calls. But if you’re looking for a way to target specific stocks upon further downside, this approach proves that it isn’t always a bad idea to go naked.
Best wishes,
Nilus
Source: Money and Markets
Portugal is big warning flag for ALL investors!
|
Remember 2007 when the subprime mortgage crisis began to unravel? If you recall, the cracks in the real estate market were exposed. And the problems kept spreading. First it was small mortgage lenders that went bust. Then it became evident the entire financial system was going down.
But contrary to the glaring evidence, the three most influential figures in the United States — President Bush, Treasury Secretary Paulson, and Fed Chairman Bernanke — stood before cameras, time after time, telling the public not to worry. “The subprime crisis is contained,” they professed.
Soon thereafter, Paulson went to Congress asking for $700 billion to avert a total global meltdown.
After that, the message from government officials changed on a dime. The big three stood before the people telling them it was time to worry! They declared that the massive emergency Troubled Asset Relief Program (TARP) was absolutely critical.
“Otherwise,” they warned listeners …
“More banks could fail, including some in your community. The stock market might drop even more, which will reduce the value of your retirement account. The value of your home could plummet. Foreclosures could rise dramatically. And if you own a business or a farm, you’ll find it harder and more expensive to get credit.
“More businesses will close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it’ll be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.”
Well, they got the $700 billion. And we still got all of the above, plus more!
Those who bought into the confidence-massaging campaign were led like sheep to walk off the edge of the cliff. Many were caught on the wrong side of a collapse in global financial markets, a freeze in global credit, and were sideswiped by the sharpest downturn in global economies since the Great Depression.
While the fallout from this crisis remains with us today and the economic outlook uncertain, there’s another act to this saga that is ongoing. And the script reads in a similar way.
This time, however …
Its Roots Are in Europe
But it’s not private debt that’s exposing the world to another wave of global crisis, rather it’s public debt. And for the past year, we’ve witnessed more government campaigns to shore up confidence by European officials who have:
- Said it was contained,
- Rolled out numerous plans to resolve the crisis, and
- Denied that any country in the euro zone would fail.
Yet we continue to see the dominoes of an unsolvable sovereign debt crisis in Europe fall, and the probability of the default of a European monetary union member country rise. They’ve managed to extend the timeline of the fallout, but they’ve done nothing to change what seems to be its inevitable fate.
|
The fact is the euro-zone debt crisis could make the subprime crisis look like just the opening act. Euro-zone banks are heavily exposed to sovereign debt of weak euro members. And asking creditors to take a haircut on their investments means banks in Europe would have to eat losses.
That’s exactly what European officials are trying to avoid!
Instead, through the rules set by the EU and IMF for doling out rescue funds, it’s the people who are asked to absorb all of the pain through tough austerity measures. But the people are beginning to rise up and demand that the burden be shared.
Now we have …
Portugal, the Next Falling Domino
First it was Greece, then Ireland, and now Portugal looks like it’s days away from requesting a lifeline.
|
This week, Portuguese Prime Minister Socrates presented his plan of tough austerity measures to Parliament, to reign in the unsustainable debt and deficits that have put the country on the edge of insolvency. Portugal’s parliament voted it down. Socrates promptly resigned.
Consequently, Portugal has sent a clear message to the EU/IMF leadership: The people are not willing to absorb all of the pain!
But if the weak countries reject a rescue, it would destabilize the financial system. And if the EU/IMF compromises its terms for rescuing the weak by making creditors share the burden, it would endanger the financial system.
Simply put: It’s a no-win all the way around.
The question is then: Will Portugal be the lynchpin that collapses the euro? If so, expect the reverberations to be felt across all markets.
Regards,
Bryan
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The Greatest Complacency of the 21st Century
|
Many of our readers know intuitively that their neighbors and friends have become complacent about the world around them, but they don’t know how to prove it.
Today, I’ll show you two ways to do just that.
The key is that rising equity prices usually lead to an increase in stock market optimism, while falling prices generate stock market pessimism.
That alone is no justification for bearish or bullish strategies — until it reaches an extreme.
So the questions are: How do you measure this optimism or pessimism? And how do you know when it’s at an extreme level?
Right now, I’d like to focus on two measures in particular …
Mutual Fund Cash Levels
The average cash allocation of mutual fund managers is one of the most important sentiment indicators available — and for good reason: Forty percent of all U.S. stocks are held by mutual funds. So their buying and selling can easily move the market.
What’s especially remarkable is that fund managers are as prone to the herding instinct as any other group, which leads to an interesting pattern in their investment behavior:
Mutual fund managers almost invariably hold relatively high cash levels near market bottoms, and relatively low cash levels in the vicinity of important market tops.
Go back to March 2000, for example, near the top of the tech stock bubble. Precisely when they should have been taking profits off the table, mutual fund managers loaded up with stocks and ran their average cash levels down to 3.7 percent. For them and their shareholders, it was a disaster. For astute investors, however, it was a blatant and very TIMELY sell signal!
But now look:
Mutual fund cash levels are even lower than they were in March of 2000!
In fact, according to the Investment Company Institute, mutual fund cash levels are currently at an extremely low 3.5 percent. They have been that low just twice before:
- First, in the summer of 2007, at the climax of the 2003-2007 cyclical bull market.
- Second, in March/April 2010 right before the flash crash of May 6, which marked the beginning of a 17 percent market correction.
What’s most remarkable is that, as you can see in the chart below, cash levels have been very low for more than a year. This tells us that the only thing driving the market higher is the Fed, and we don’t doubt their ability to continue their money pumping. But the history of this indicator suggests that the next vicious bear market may be lurking around the corner.
Another indicator I closely follow is …
Investors Intelligence Advisor Sentiment
Investment newsletter editors play an important role in influencing and driving investor sentiment; and Investors Intelligence has developed a relatively reliable sentiment indicator to track them.
Here, too, a pattern is clear:
Compared to mutual fund editors, newsletter writers seem to be more flexible, adapting more rapidly to changing market conditions. So when they’re overly bullish as a group, it often has only short- to medium-term bearish implications.
But still, long stretches of extreme bullish sentiment as measured by this indicator has often marked major tops.
As you can see in the second panel on the chart below a high degree of bullishness has been persistent for nearly four months. And the trigger line for a bearish signal — more than 55 percent bulls — has been broken.
This is another clear warning sign that a larger correction is overdue. Moreover, despite the stock market correction of the past few weeks, bullish sentiment has prevailed. That’s very unusual, and I think it’s another confirmation of the bearish signal!
Indeed, we see little or no angst even in the wake of ominous news coming out of Japan, North Africa, and the Middle East!
That’s complacency par excellence — historically a sign of an imminent stock market top.
If you are looking to profit from falling stock markets, I’d say that a decline in the Nasdaq 100 is the most probable. So you might consider ProShares Short QQQ ETF (PSQ) in the $33-$34 range. This inverse ETF is designed to rise 1 percent for every 1 percent drop in the NASDAQ-100 Index.
Best wishes,
Claus
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com
Rising Inflation Turning Up the Heat on Central Bankers!
|
A hilarious thing happened earlier this month. The President of the New York Fed, William Dudley, tried to justify the Federal Reserve’s easy money policy.
In a speech before the Queens Chamber of Commerce, he claimed inflation wasn’t a problem, noting as one example that:
“You can buy an iPad2 that costs the same as an iPad1 … you have to look at the prices of all things.”
The response from the crowd? Utter disbelief! One person in the crowd referenced the rampant food inflation we’re seeing by asking Dudley,
“When was the last time, sir, you went grocery shopping?”
Another quipped,
“I can’t eat an iPod!”
Me?
I can’t believe the claptrap the Fed is peddling either! Former Goldman Sachs economists like Dudley and his Ivy League-educated boss Ben Bernanke may say (at least publicly) that inflation is under control. But the rest of us in the Real World know that’s bupkis.
Gas. Food. College. Heck, Diet Coke! It’s all getting more expensive.
More importantly, the OFFICIAL data is now confirming what you and I are seeing every day. That’s turning up the heat on central bankers worldwide — with important investment ramifications for you.
Don’t Look Now, but Inflation
Gauges Are on the Rise!
We get three major inflation reports every month here in the U.S. — one each on import prices, producer prices, and consumer prices. So what did the latest figures show?
* Import prices jumped 1.4 percent in February from January. That easily topped forecasts, and it was the fifth month in a row where prices rose by more than 1 percent. Imports cost 6.9 percent more than they did a year earlier, the fastest inflation rate in nine months. And imported food shot up the most in any month since the government began tracking in 1977!
|
* Producer prices surged 1.6 percent, the biggest monthly gain since June 2009! Wholesale goods and services are now rising in price at a 5.6 percent year-over-year pace, the most in almost a year. Further up the pipeline, intermediate goods rose in price at the fastest pace since July 2008 while crude goods jumped another 3.4 percent.
* Consumer prices jumped 0.5 percent, the most in 20 months! Price increases at the “core” level are also picking up, rising by two-tenths of a percent for two months in a row. That’s something we haven’t seen since the fall of 2009.
Then earlier this week, we learned that U.K. inflation surged to 4.4 percent in February. That was faster than the 4.2 percent expected by economists, and the worst reading in any month since October 2008. Consumer inflation in the 17-nation euro zone is also picking up. At 2.4 percent in February, it’s now comfortably above the European Central Bank’s 2 percent “limit.”
Market Sands Shifting as
Price Pressures Increase
Look, central bankers can try to stick their heads in the sand for a while when the numbers take a turn for the worse. That’s what U.S. policymakers — and their developed world counterparts in the euro zone and U.K. — were doing for a while.
But our foreign counterparts are showing increasing signs of breaking ranks. That’s leading to speculation the ECB could hike rates as soon as next month, with the U.K. not far behind in July.
Here in the U.S., Bernanke is still (yes, STILL!) dragging his feet. But the yield curve continues to flatten as I predicted several weeks ago. And investors are continuing to bet against him in the interest rate futures market.
So why should this matter to you?
|
Well, I wouldn’t be surprised to see risk assets like stocks get hit as slightly tighter monetary conditions get priced in. I also continue to believe the dollar is vulnerable.
I’d use the “relief rally” we’ve seen in the wake of the Japanese quake and nuclear crisis to lighten up on stock market risk. I’d also look to hedge currency risk in my fixed income portfolio using investments such as the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG). Foreign bonds tend to rise in value when the dollar falls because each interest or principal payment remitted in a foreign currency translates into more dollars as it’s repatriated.
Oh, and if a Fed official shows up in YOUR town to talk policy? Feel free to heckle all you want! These guys don’t know what the heck they’re talking about when it comes to inflation.
Until next time,
Mike
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The Rundown on Japan ETFs
|
We’re less than three full months into 2011, and the year is already chock-full of stunning world events. Yet if you depend on the media to tell you what is happening, you may miss some of the most important news.
Case in point: U.S. and European intervention in Libya pushed the Japanese disaster right out of the headlines! The nuclear plant explosions were dramatic, of course, but long-term damage from the earthquake and tsunami is potentially much more significant. Today I’ll tell you what it all means for Japan-related ETFs.
Japan Matters …
First, let’s get past the idea that Japan doesn’t really matter to the rest of the world. Yes, China recently moved ahead to become the world’s second-largest economy. Japan, however, is still third — and with a much smaller population and very few natural resources.
But in stock market terms, Japan is way ahead of China and second only to the U.S.
As a matter of fact, Japanese stocks currently comprise 8.8% percent of the MSCI All-Country World Index ETF (ACWI), and a whopping 21.9 percent of the international benchmark iShares MSCI EAFE Index ETF (EFA).
Of course I like China as well. My point is that Japan can’t simply be dismissed as irrelevant.
|
Certainly the damage in Japan is significant and the loss of life heart-breaking. The nation also has plenty of other long-term problems. Yet we may look back and see that the sell-off in Japanese stocks was overdone.
Am I recommending you jump into Japan right now? No, I’m not. The effects are still being assessed. I think it’s better to wait and see how much infrastructure was destroyed.
That’s why this is an excellent time to review the many ways you can invest in Japan with ETFs. U.S. investors can pick from more than a dozen Japan equity ETFs and yen currency ETFs.
Here is the rundown:
The 7 “Long” Japan Equity ETFs
- iShares MSCI Japan (EWJ)
- SPDR Russell/Nomura PRIME Japan (JPP)
- iShares S&P/TOPIX 150 (ITF)
- WisdomTree Japan Small Cap Dividend (DFJ)
- SPDR Russell/Nomura Small Cap Japan (JSC)
- iShares MSCI Japan Small Cap (SCJ)
- WisdomTree Japan Hedged Equity (DXJ)
EWJ is by far the biggest and most actively-traded name on the list. EWJ, along with JPP and ITF, offer similar portfolios of the biggest Japan-based public companies.
The remaining four Japan ETFs are more specialized:
- As the name suggests, DFJ holds small cap stocks that pay dividends.
- JSC and SCJ focus on small caps as well, but use different weighting strategies.
- DXJ offers broad-based Japan exposure but with a twist: The impact of the U.S. dollar/Japanese yen exchange rate is hedged. This means DXJ reflects the movement in Japanese stock prices alone. Of course this can be good or bad, depending how the yen performs.
|
Inverse and Leveraged
Access to Japan
ProShares provides investors a way to leverage their Japanese stock bets on both the upside and the downside:
- ProShares Ultra MSCI Japan (EZJ)
- ProShares UltraShort MSCI Japan (EWV)
EZJ is essentially a version of EWJ on steroids. On any given day, EZJ is designed to give you twice the performance of EWJ. And if you think the Japanese market will continue to fall, then EWV could give you twice the inverse of EWJ.
These ETFs should be used with caution, as I’ve pointed out in a past Money and Markets column.
Trading the Yen with ETFs
My colleague, currency expert Bryan Rich, just wrote last week that ETFs offer a great way for individual investors to participate in the foreign exchange markets. And here are the yen-based products you might want to consider:
- CurrencyShares Japanese Yen (FXY)
- WisdomTree Dreyfus Japan Yen (JYF)
- iPath JPY/USD Exchange Rate ETN (JYN)
- ProShares Ultra Yen (YCL)
- ProShares UltraShort Yen (YCS)
The ProShares ETFs offer long (YCL) and short (YCS) yen exposure. And both are leveraged with the goal of providing twice the movement of the daily exchange rate changes.
Whatever their stock and currency markets do, I wish our Japanese friends well in their recovery and rebuilding efforts. I know they will bounce back.
Best wishes,
Ron
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Unbundle the Stock Market with Sector ETFs
by Ron Rowland
 |
Investors often think about “the stock market” as if it were some kind of giant creature rumbling through the woods. However, the stock market is more like a whole bunch of little creatures, each of which can move on its own. Yes, there’s a general tendency for equities to go in the same general direction — but there are almost always exceptions.
This makes perfect sense when you think about how industries come into and out of favor with investors. Different types of businesses tend to thrive under different economic conditions.
 |
For instance, so far this year technology is way up while utilities are mostly flat. In 2008, consumer staples were far ahead of financial services. Energy was the winner in 2007. And back in 2006 the same utilities stocks that are going nowhere this year were the hot sector to own.
Of course, knowing ahead of time which part of the market will outperform isn’t always easy. You have to do your homework and get good advice.
But once you decide where you want to focus, sector exchange traded funds (ETFs) are a great tool to implement your strategy.
Breaking Down the Market …
To illustrate how this works I want you to think about the S&P 500 Index — a list of 500 large stocks selected by a committee at Standard & Poor’s. If you own SPY (an ETF based on the S&P 500), you have a broad position in U.S. stocks: The sectors that are going up and those that are going down or sideways.
 |
| Sector ETFs let you break down the S&P 500 into many different industries. |
There is a way, however, to pull apart SPY and concentrate only in the sectors you want. The Select Sector SPDRs are a family of nine ETFs based on the S&P 500 — with a twist. Each of the nine includes only the S&P 500 stocks that belong to a particular industry, and there’s no overlap.
Here is the complete list of Select Sector SPDRs and the number of stocks each owns:
- SPDR Consumer Discretionary (XLY), 78 stocks
- SPDR Consumer Staples (XLP), 41 stocks
- SPDR Energy (XLE), 40 stocks
- SPDR Financial (XLF), 79 stocks
- SPDR Health Care (XLV), 53 stocks
- SPDR Industrials (XLI), 59 stocks
- SPDR Materials (XLB), 30 stocks
- SPDR Technology (XLK), 85 stocks
- SPDR Utilities (XLU), 35 stocks
Add up those numbers and you’ll get 500. If you were to buy all nine funds in just the right proportions, you would own the equivalent of a position in SPY, the S&P 500 ETF.
What are the right proportions? Because the index is weighted by market capitalization, it changes each day. So once you buy your holdings your representative portion of the S&P 500 will automatically adjust with daily market movements. The chart below shows you the breakdown as of 10/16/09.
You’ll notice that technology (XLK) currently has the biggest slice of the pie. Materials (XLB) and utilities (XLU) are tiny in comparison. This can change. A few years ago energy (XLE) was only a small part of the pie, too. Watching these changes can reveal a lot about which parts of the economy are growing and shrinking.
These ETFs are great tools to help you add exposure to sectors you like, and perhaps more importantly, avoid exposure to sectors you think are going down.
For instance, suppose you are bullish on technology. If you invest in SPY or any other broad index fund, less than a quarter of your money will be going into tech stocks …
However, if you buy XLK, you’ll get a concentrated portfolio of the largest U.S. technology companies — much more bang for your buck!
The Select Sector SPDRs aren’t the only sector-based ETFs, of course. Similar products are offered by iShares, PowerShares, and other sponsors. Each has its own unique methodology.
You can even drill down further and get more specific sector allocations. You can do the same thing with technology, health care, and other sectors, too.
Sector ETFs are, for my money, one of the best investment tools ever invented. Learn more about them and I bet you’ll agree.
Best wishes,
Ron
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com
In the Least Ugly Contest, the Dollar Is Ready to Rally!
|
Fundamentally, the U.S. has major problems. The government’s budget deficit is projected to hit a record $1.6 trillion this year — nearly 11 percent of the gross domestic product, making it the biggest gap between spending and revenues since World War II. And it is facing annual deficits of more than $1 trillion as far as the eye can see.
Even the Bank for International Settlement (BIS), often called the central banks’ central bank, has admitted that the current debt policy in the U.S. is unsustainable. Sooner or later it will lead to a funding crisis, which will then force major economic and political adjustments.
But Europe isn’t doing any better …
For example, credit default swap spreads on Greek government bonds recently widened by 24 basis points when Moody’s slashed the country’s credit rating three notches to B1. It has become increasingly obvious that Greece’s debt problem has not been solved and cannot be solved without debt restructuring — the politicians’ way of saying “debt default.”
Ireland and Portugal are in the same boat. And Spain isn’t far behind. Since Spanish real estate is still massively overvalued — some economists say by as much as 40 percent — Spain looks like an accident waiting to happen.
And what are Europe’s politicians doing about all of this?
Well, they are pretending that everything is A-OK and the European rescue package was the final solution to this major problem. Of course it is not …
You can’t wipe out mountains of debt by simply issuing more debt! The rescue package was nothing more than kicking the can down the road. It bought them some time. But it didn’t get them one iota closer to a solution.
And for an idea of what’s in store …
Look at Ireland for a Clue
Ireland just voted for a new government. I interpret that as a clear vote against the severe austerity program the European Union (EU) has urged Ireland to implement. Yet the Irish population has no incentive to bear that policy’s painful burden. Why should they?
After all, most Irish government bonds are held by foreign financial institutions and the European Central Bank (ECB). Why not let them share some of the burden; let them take some losses?
Didn’t Iceland do relatively well after it simply repudiated its debt? Why not follow this easier path, the Irish are understandingly starting to ask, even if the cost of doing so is to get rid of the euro.
And Greece, Portugal, Spain, and others might come to the same conclusion.
So as far as the dollar and the euro are concerned, it all comes down to a contest of ugliness … and you have to pick which is the least ugly!
But before you pick, you must understand that …
The Euro Has an Additional Problem …
The EU has a major disadvantage compared to the U.S. in dealing with over-indebtedness: Singular national interests. Therefore it is much more difficult for European politicians to go along with the unavoidable and accept the tough choices that must be made.
Agreement over necessary major spending cuts and potential defaults, which will undeniably bring hardship in the short- to- medium-term, is very hard to come by.
That’s because national interests vary widely …
For example, what’s in the best interest of Greece, Ireland, Portugal, or Spain is definitely not what Germany and the other relatively healthy countries want.
|
The likely outcome of this explosive mix, a euro crisis, is becoming increasingly probable. What’s more, the chances of the euro not surviving in the coming years climb with each passing day.
There is no easy way out of the European government debt trap. Sooner or later someone will opt for a severe hair cut. Then all hell will break loose with the euro.
Of course there is widespread unwillingness to accept the unavoidable in the U.S. as well. But compared to Europe, chances are much greater that a national agreement to make these hard choices will finally be accomplished.
So to me it seems that there are fewer obstacles to overcome in the U.S. than there are in the EU.
Plus there is a lot more at stake for the U.S. than just another recession, even a very severe one.
You see …
The U.S. Has a Reserve
Currency to Lose
The U.S. has a huge privilege its economic and political elite are well aware of: The dollar is the world’s reserve currency. Losing this privilege would be a major long-term loss not only for the economic well being of the nation but also in terms of global dominance.
Ben Bernanke and his predecessor, Alan Greenspan, fell short of the responsibility that comes along with this privilege. Their easy money policy played — and still plays — a prominent role in digging the hole the U.S. is in. And Bernanke doesn’t seem to get it! But this, too, will change. Or there will be a change in Fed chairmanship.
To me it’s more like a question of time until the U.S. accepts the truth and starts doing the right thing. If not, the nation will face a crisis of major proportions.
It is not clear, though, when the time for a return to sound fiscal and monetary policy will come. That’s why I am a long-term dollar bear and a long-term euro bear. This of course means that I am a long-term gold bull.
The same fundamentals that strongly impede fiat currencies support the long-term gold bull market. Therefore I suggest investors consider taking a long-term strategic gold position in a gold exchange traded fund (ETF), like GLD, until a major policy change comes about.
But that doesn’t mean there aren’t any …
Opportunities in Paper Currencies
Currently, the dollar’s decline in terms of other currencies seems somewhat overdone. And technically the dollar looks appealing. As you can see in the chart below, the Dollar Index, which measures the dollar against a basket of currencies, is sitting at a major uptrend line.
At the same time sentiment indicators towards the dollar are as bearish as they get. In fact, they’re back to levels last seen at the important lows of October 2009 and November 2010.
Look at the following chart for the positioning of what the Chicago Mercantile Exchange (CME) calls large speculators. Their cumulative position against the dollar is larger now than at the low of March 2008 and November 2009 — when the dollar was much lower.
So it’s very probable that the dollar will soon shoot to the upside — at least for a few months. If you’re inclined to get in on that action, now might be a good time to buy an ETF like PowerShares DB U.S. Dollar Bullish ETF (UUP).
Best wishes,
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
