The 'Reflation' Top Ten Portfolio 22 comments
-
Font Size:
-
Print
- TweetThis
"Inflation is taxation without legislation."
-- Milton Friedman
I have been running a private investment advisory newsletter in which I pick a "Top Ten" Portfolio for four years now. In 2008, I did not issue a "Top Ten" portfolio based on the fact that I thought it would be a very difficult year to invest. As we now know, that may have been the understatement of the century. But things are getting interesting and I believe that after the washout that was 2008 there will be more opportunities in 2009.
The investment landscape has changed dramatically in the last 12 months. The investment banking industry has been obliterated. Fannie Mae (FNM), the largest mortgage buyer on the planet, has been taken over by the U.S. government. The federal government has expanded its balance sheet to over $1 Trillion (the truth is, nobody knows by exactly how much) and is taking large stakes in private businesses. We're becoming "Francified" as the country moves toward large-scale socialization of industry.
Nearly all asset classes were destroyed in 2008: Equities, corporate bonds, municipal bonds, real estate, oil, industrial commodities. Almost everything was down 40-60%. I guess we can take solace in the fact that we weren't Iceland, where the stock market declined 95%! There were really only two places to hide: 1) Gold, of which I have been a big fan (and still am), which ended the year up 5% 2) Treasury bonds, which mounted their largest rally in history, up anywhere between 10-20% depending on which flavor you were in. 2009 will certainly throw a few curveballs.
Where does it all lead? Unfortunately, Americans aren't very good at making baguettes, so the "Francification" isn't a good look for us. As the government takes on more and more liabilities of the private enterprise, prints up money, and seeks to bail out the economy by the creation of new public debt, this could lead to the largest inflationary bubble of our lifetime.
I believe we will see a "divergence in asset classes." As the government prints more money, expands its balance sheet, and becomes the public dumpster of all toxic assets that caused the collapse in the market, savvy investors are likely to run for the cover of assets that would hold their value in an inflationary environment as global governments begin a mad race to "print the most money." In just the last month, we have seen data that indicates that we are diverging away from the fear of deflation and moving back toward inflation. How's that? True, CPI is still going down, but that is a lagging indicator and mostly linked to the collapse of energy prices. M1 and various reconstructed forms of "M3"—the Broad Money Supply – are leading indicators, and they show that money supply is beginning to explode. This will lead to inflation down the road.
I believe the "stuff" trade will be back on, as people protect themselves against the coming inflation. As Jim Rogers, the commodities investor and founder of the Quantum fund has pointed out, commodities do not have "impaired" fundamentals. That is, the fundamentals for many commodities, especially agricultural commodities, remain incredibly strong (for example, wheat stocks are at their lowest point in history while global demand for food hits new highs). Financial assets, including government balance sheets, are, in fact, impaired. Nobody knows where the federal government balance sheet will end up after this process, nor what it will be valued at. Therefore: Capital will flow to more easily valued stuff: Corn, Wheat, Gold, and high-quality, and, hopefully, dividend paying stocks with stable businesses.
In 2009, you might not be able to buy a new Escalade on bank credit, but you will need to eat and buy food. And those with capital will need to find places to earn a return, which I believe will be the themes below.
Some themes and potential winning trades I see in 2009:
- Shorting Treasury bonds – possibly one of the best trading opportunities in a long time.
- Precious metals and agricultural commodities are likely to outperform.
- Energy will return, along with the precious metals and grains. It is interesting that major diversified oil companies such as Chevron (CVX) has stabilized ahead of crude oil, and we think that is a favorable sign for energy stocks.
- The stock market could see a benefit from the return to liquidity, and for that reason it would not surprise me to see the market rally for the next 2-3 months. It is a good time to test the equity waters with some high- quality dividend-producing stocks, if only because they are a decent hedge against inflation and the dividend "pays you to wait." But take it slow and easy! Dollar-cost averaging rules, and have a long time horizon.
- High-quality corporate bonds are also interesting. Individual corporate bonds take a lot of work to understand and I am no expert, therefore I am going to stick with some reputable funds, including the BlackRock Income Opportunity Trust. However, any stock market rally should be seen skeptically and sold accordingly. I doubt that a new bull market can emerge in 2009 because of issues with corporate profits.
Below is my "Top Ten" portfolio for 2009. This year, our portfolio "goes to 11" because we like to add another unit of diversification to our approach. A more complete explanation is posted on my blog at www.futuresfanatic.com. Here it is:
Top Ten Portfolio 2009 – The "Macro Portfolio"
1) Gold – Either iShares Gold (GLD) , gold futures, or physical bars and coins.
2) Silver – Either iShares Silver (SLV), silver futures, or physical silver.
3) DBA – Powershares Agriculture ETF
4) BNA – Blackrock Income Opportunity Trust
5) BPT – BP Prudhoe Trust
6) CVX – Chevron
7) BMY – Bristol Myers
8) MCD – McDonald's
9) BDX – Becton Dickinson
10) GILD – Gilead Sciences
11) TBT – Double Short Treasury Bonds (Note: you are selling bonds short when buying this ETF)
Disclosure: I am invested in all of these themes.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 22 comments:
Gold coins are excellent..silver are not..cumbersome and except for junk carry 35%+++ premiums....
One other potential energy trade that was highlighted in Barron's within the past few weeks was Linn Energy, LLC (LINE). It currently trades around $16 and yields about 15.7%. It was trading just over $12 when the Barrons article hit the pavement. Up nearly 25% since and still not a bad deal.
Per Yahoo Finance:
Linn Energy, LLC, through its subsidiaries, engages in the development and acquisition of gas and oil properties in the United States. The company has oil and gas, and natural gas reserves in Mid-Continent, which includes the Texas Panhandle operating area; and Western region comprising the Brea Olinda field of the Los Angeles Basin in California. As of December 31, 2007 the company had proved reserves of 1,945.5 billion cubic feet equivalent of oil and gas, and natural gas liquids. It also operated 7,305 gross productive wells.
finance.yahoo.com/q?s=...
www.linnenergy.com
This is only information, not a recommendation. You are responsible for your own investment decisions. Do your own research before committing any money.
I do not have any position in LINE.
On Jan 07 09:44 AM Greg Pinelli wrote:
> Certainly more forward thinking than "tomorrow will be just like
> today only worse" deflationist crowd. Especially like the double
> short on treasuries...TBT..hard to imagine anyone is going to think
> their money is "safe" when inflation is back up to 7-8% and they're
> getting 1-2%.
> Gold coins are excellent..silver are not..cumbersome and except for
> junk carry 35%+++ premiums....
I am holding fairly long term. I assume if the Bond goes down over time, this would go up -- whether it's 1 day or six months, yeah?
I am also shorting treasury futures, which are a more expedient vehicle (but with leverage needs to be watched very closely).
On Jan 07 09:48 AM Geoffrey Lordi wrote:
> Considering that the ProShares double inverse vehicles yield that
> double inverse *only per day* (and not per week, month, or year),
> should we assume that you are only holding TBT on certain days? After
> all, there've been countless examples of what happens to these vehicles
> when they're not held as intended: for the extremely short term.
> (Disclosure: we've held SSO, DXD, FXP, and EEV.)
My point re: ProShares etfs is that they are designed for very short term applications and do not definitively track 2:1 or 1:2 over the long term, even after accounting for fees. For example, I'm currently comparing SSO:SPY. At 11.41AM, SSO is down just shy of 100% more than SPY, which makes sense since SSO is an S&P Ultra etf...However, because of the options-strategy based manner which motivates SSO, if the S&P is up 2.1% this month, I cannot expect that SSO will be up 4.2%; similarly, if the S&P is up 6.2% at year end, I cannot expect 12.4% gains (even without considering fees) from SSO. Sometimes this works out for the better (overshot gain performance), sometimes not (vastly undershot performance). A prime case to support the former situation is SDS' one month performance: +5.69% vs the S&P's +5.05%.
Here are some examples that led folks astray over the last *year*:
FXI (China) down 47%, but its double-inverse FXP short down 58%;
EEM (emerging mkts) down 47%, its double-inv EEV down 38%;
IJR (Russell 2000) down 28.3%, TWM down 22.4%.
But...
SPY down 35.1% and SDS up 16.4%;
XLU down 30.5% and SDP up 15%...
There are other examples - some where the ProShares funds have overperformed: some where the opposite is true.* And while some folks would gladly take unexpected overperformance, we should be wise to realize that it *isn't* unexpected. After all, ProShares said it best on their website:
"ProShares are designed to meet daily objectives; results over longer periods may differ."
* These comparisons valid between 11AM and 12PM on Jan 7.
Don't get me wrong - I enjoyed your article. I just ask that you don't expect 2:1 *for sure* on your TBT strategy.
Take care,
Geoff L
GL above is right that the leveraged ETFs go off benchmark over time, the math is canvassed pretty well elsewhere - google. But I'd disagree it's unwise to hold them for a while. Many have been out for a couple of years: just chart the ones you hold or the ones GL discloses against their benchmarks to see how they've been performing as this mess has developed. For example, a two year chart of SPY vs SSO will show 35% vs 70% - not bad tracking. The SDS double short is "only" up 15% in absolute terms, but that's 50% better than the SPY. The less liquid or less well-designed ones don't do so well.
For now, we have advocated getting long TBT or short TLT as most retail investors don't have any other option to short longer dated treasuries outright. We're monitoring the correlation between TBT and the index to see how far off the tracking might be and on the hunt for other vehicles. But, overall, we definitely believe that shorting those treasuries can be a profitable trade over time. However, we are advocating this trade with no rush, seeing as it will most likely take a long time to play out. Our rationale behind shorting longdated treasuries here: www.marketfolly.com/20...
I can see with these ETFs there is a lot of room with shenanigas. The bid/ask is often very wide, and even intraday, they are not good vehicles to trade because they can be out of whack with the index.
Unfortunately, I can't think of many other ways to advocate shorting treasuries, though. I short the futures, but that requires futures trading skills and you will also lose money on the slippage and the rolling of the futures contract. So is there ever a perfect system? You could also short TLT but my guess is that would take even more capital than TBT and it would be hard to make money.
On Jan 07 12:00 PM Geoffrey Lordi wrote:
> Hello, Rayno,
>
> My point re: ProShares etfs is that they are designed for very short
> term applications and do not definitively track 2:1 or 1:2 over the
> long term, even after accounting for fees. For example, I'm currently
> comparing SSO:SPY. At 11.41AM, SSO is down just shy of 100% more
> than SPY, which makes sense since SSO is an S&P Ultra etf...However,
> because of the options-strategy based manner which motivates SSO,
> if the S&P is up 2.1% this month, I cannot expect that SSO will
> be up 4.2%; similarly, if the S&P is up 6.2% at year end, I cannot
> expect 12.4% gains (even without considering fees) from SSO. Sometimes
> this works out for the better (overshot gain performance), sometimes
> not (vastly undershot performance). A prime case to support the former
> situation is SDS' one month performance: +5.69% vs the S&P's
> +5.05%.
>
> Here are some examples that led folks astray over the last *year*:
>
>
> FXI (China) down 47%, but its double-inverse FXP short down 58%;
>
> EEM (emerging mkts) down 47%, its double-inv EEV down 38%;
> IJR (Russell 2000) down 28.3%, TWM down 22.4%.
>
> But...
> SPY down 35.1% and SDS up 16.4%;
> XLU down 30.5% and SDP up 15%...
>
> There are other examples - some where the ProShares funds have overperformed:
> some where the opposite is true.* And while some folks would gladly
> take unexpected overperformance, we should be wise to realize that
> it *isn't* unexpected. After all, ProShares said it best on their
> website:
>
> "ProShares are designed to meet daily objectives; results over longer
> periods may differ."
>
> * These comparisons valid between 11AM and 12PM on Jan 7.
>
> Don't get me wrong - I enjoyed your article. I just ask that you
> don't expect 2:1 *for sure* on your TBT strategy.
>
> Take care,
> Geoff L
>
>
LOL. raytayzmd, how do you really feel? Well, you made the 7% back easy in the last two weeks. I will look at JGG but yield always has its cost. I like Blackrock because they have a government franchise now in the "Bailout Bucks" and are likely to have "very good information." But everybody should do their own due diligence.
On Jan 07 11:44 AM raytayzmd wrote:
> ...BNA????...BNA is a CEF trading at par with its NAV and yielding
> less than 7% with an expense ratio somewhere around 4%...you consider
> that worthy of a top ten list???...compare JGG trading at a discount
> of 11%, yielding 10%, and with an expense ratio of 1% and pretty
> much holding the same stuff as BNA...pardon me if I don't hire you
> as a financial advisor.
of assets/holdings.
All of the very general arguments for a commodities resurgence, such as shortage, record demand, high national debt, etc. were true a decade or more before the last time this area outperformed. Equity value is more likely to be found in out-of-favor sectors that nobody is even thinking about.
I propose to SA to make "REALITY CHECK METER" photo album where we can see a super trader wearing Patek or even Omega or sitting in his Bentley or at lest BMW 3.
I make about 10,000-15,000 $ a month trading on my own and have no boss but when I read SA experts I feel like I am kinf of freak or homeless.
- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)
We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
- Corn is US$ 4/bushel currently compared to US$16/bushel in 1974,
- Wheat is US$ 6/bushel currently compared to US$27/bushel in 1974
- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981
Agcapita allows farmland investors to cost effectively allocate a portion of their portfolios to hard assets in the form of Canadian farmland via its professionally managed Agcapita Farmland Investment Partnership. Agcapita Farmland Investment Partnership is the third in a family of private equity funds which has grown to almost $100 million in assets under management.
Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.
Agcapita’s advisory Board is composed of accomplished agriculture entrepreneurs and academics, high profile political figures and investment experts including the former UK Chancellor of the Exchequer, Rt. Hon. Ken Clarke and Jim Rogers, co-founder of Quantum Fund.
Jim Rogers is extremely bullish on western Canada and on western Canadian agriculture in particular. At the recent annual CFA awards dinner in Toronto Jim told the assembled crowd of fund managers and investment bankers to “sell your houses, move to Saskatchewan, buy a tractor and some farmland, and start farming”.
At the recent annual CFA awards dinner in Toronto Jim told the assembled crowd of fund managers and investment bankers to “sell your houses, move to Saskatchewan, buy a tractor and some farmland, and start farming”.
Indeed this action might just be the re-education that fund managers need after their dismal behavior these last few years.