Ah, it is that time of year again. The New Year Eve is upon us, it is snowing, people are making wishes that will be broken in weeks, kids are watching ice sculptures in the public park and fireworks in the night, and pundits are making calls for the best investments in 2013. Of course, history predicts that the pundits will all underperform the market.
Prediction, as the saying goes, is a difficult thing to get right, especially if it concerns the future. That is not keeping the pundits from making predictions, however, and it is not going to keep me from the same either. So, I will get straight to the point. These are my 5 choices for investments in the USA 2013. This is how I have invested 80% of my US portfolio, leaving the rest in cash for options trading. (I will write in future about my ex-U.S. portfolio, which is more than half of my total portfolio.)
- iShares Dow Jones US Home Construction ETF (ITB)
- ProShares Ultra Industrials ETF (UXI)
- Direxion Russell 1000 Financials Bullish 3X ETF (FAS)
- ProShares UltraPro S&P 500 ETF (UPRO)
- UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN (BDCL)
The general theme should be clear from the above choices. I am quite bullish on decent growth continuing in the USA next year as the Feds continue with the QEternity. For those that are wondering what QEternity is all about, the Feds just made two key decisions. As reports Forbes:
On Wednesday, the FOMC announced more quantitative easing at a rate of $85 billion a month for an extended period of time. The Bernanke Fed has also modified its guidance, noting its ultra-accommodative stance will remain in place until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% two years out.
What is the net effect of this?
The Fed will continue to use $40B of this $85B to keep buying mortgage-backed securities as it has been doing since QE3, which in turn will continue to keep mortgage rates down. This will do two things. One, it will continue to free up cash for homeowners, which will then push up consumer demand, the bread and butter of the U.S. economy. Two, it will continue to support home prices. Home prices have been improving for a while, as the Case-Shiller index continues to confirm:
Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed home prices rose 4.3% in the 12 months ending in October in the 20-City Composite.
The Fed will do something even better with the remaining $45B of the monthly monetary injections. It will buy longer-dated U.S. Treasuries outright. It will buy so much of this, in fact, reports indicate that 90% of the total U.S. Treasuries issued will now be bought by the Fed. This does two things. It keeps the Treasuries rates low, of course, which is in turn linked to all other kinds of borrowing rates. Low borrowing rates mean higher growth for the economy. But, better yet, since the Feds would not be sterilizing any of the $85B, it increases the money supply, and hopefully with it we get out of the current low inflation environment.
Why would inflation be good for the USA? Well, I had explained it in my earlier article on Nominal GDP Targeting. Essentially, it makes employers stop stockpiling cash and start to invest, as they become worried that the stockpile will lose value fast. There is more to it, as explained in my article, but this will do for now for my thesis. More investments mean more employment, and with it more consumer spending, and higher growth.
So, there is enough reason to be bullish on U.S. growth for 2013. Now, which sectors will benefit from this? The two obvious ones are homebuilding and durable goods. The home price index supports the investment in the homebuilders, and when home indices do well, durable goods are the next to follow as homeowners buy the goodies for their dream homes.
But there will be another group who will do very well. The banks have had a hard time since 2008. The main issue were the toxic mortgage loans. If the home values increase, loans keep getting less and less toxic. If short-term interest rates stay low, the banks get an additional boost as they borrow at low rates and lend at long-term high rates. So, there is good reason to be bullish on banks in 2013.
So, we have our three priority sectors for USA in 2013, homebuilders, durable goods, and banks. What about the overall economy as a whole? Well, if consumers have extra money to spend, can borrow at low rates, and may have a bit of an inflation scare or two, they will probably spend today instead of waiting for tomorrow. This to me indicates that a small punt on the overall market may not be an unwise thing to do.
So that leads to our first 4 ETFs, in order. You have ITB for Homebuilders, UXI for durable goods, FAS for financials, and UPRO for the S&P500. Note that I tried to choose leveraged ETFs whenever possible to match my risk profile. Investors wanting the non-leveraged versions of these should still choose ITB which is non-leveraged, but then may want to choose the iShares Dow Jones US Industrial ETF (IYJ) which is the non-leveraged version of UXI, the Financial Select Sector SPDR ETF (XLF), and, of course, the SPDR S&P 500 Trust ETF (SPY).
But no portfolio is complete without some dividends.
Funny thing about dividends these days is that people are chasing them like they are perishable goods and need to be consumed tomorrow, lest they expire. The reason, of course, is the super low yield environment that we live in. People are chasing any and every yield opportunities. My first thought was to go for the historical favorites, the REITs. But given that I already have a punt on the homebuilders, I wanted to diversify a bit, and chose to put money in BDCs.
So, what are BDCs? Wiser men than me have discussed them in depth on Seeking Alpha, and I encourage everyone looking for dividends to research BDCs. As this article says:
BDC stands for business development company. What they do is to help develop companies in exchange for money or equity and often offer loans too.
... there were only two BDCs out of around 20 that reduced their dividend from one quarter to the next between 2003 and 2007, and none eliminated their dividends altogether. That is incredibly impressive. Their track record is very strong in growing economies.
Voila! I do expect the economy to be growing in 2013 as explained above. Hence, my choice for the BDCs, and of course since I love leverage, I choose BDCL, a 2x bet on the core BDC ETN. For investors wanting a non-leveraged bet, the core ETN is the UBS ETRACS Wells Fargo Business Development Company ETN (BDCS).
So, there you have it. 5 ETFs that I am betting on in 2013. If the economy falls apart for some reason in 2013, I will not be very happy, as these are all growth and recovery bets. For example, if the debt limit is not successfully raised, I will likely be in trouble. But that's the nature of New Year Eve decisions. They are like chocolates. You never know what you get.
Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.