Random Friday Notes on ETFs, Ratings, the Dollar and the Reflation Trade

The first of the emerging market sector ETFs from Emerging Global Shares set sail yesterday with the energy fund ticker EEO and materials fund EMT. The website is supposed to be up today (haven't checked yet) so we can look under the hood a little bit. IndexUniverse reported that the energy fund is 36% in Russia, which I take to mean a lot of Gazprom and a little less Lukoil but we'll see. The company seems to believe that hedge funds will be big users of their funds but I would think there stands to be utility for any investor willing to build at the sector level.

Yesterday S&P downgraded the outlook for the UK to negative from stable. Then later Bill Gross piped up about about the US' AAA rating being in jeopardy at some point which should not be a shock to anyone. We also saw the ten year yield and gold whiz higher maybe spurred by Gross, maybe not (doesn't matter whether Gross caused it or not). The entire financial crisis and the measures taken to try to fix-it puts upward pressure on treasury rates and gold. Yesterday may serve as a microcosm of what is coming even if it does not go in a straight line.

I've never been a gold bug or the like but rates would seem destined to at least go up to a normal level and most commodities should nudge a little higher.

Matt Hougan has an interesting post about a reflation trade portfolio.

Vanguard Emerging Market (VWO) 20%
Vanguard All World Ex-US Small Cap (VSS) 10%
iShares Global Materials (MXI) 10%
iShares Brazil (EWZ) 5%
SPDR China (GXC) 5% Matt has the wrong symbol in the post
SPDR Gold Shares (GLD) 20%
SPDR Internations TIP (WIP) 20%
WisdomTree Emerging Currency (CEW) 10%

(Lemme disclose MXI, GLD and WIP and get that out of the way.) Well, this baby will reflate alrighty, but seriously, it is a fairly narrow focus relying an awful lot on reflation being the outcome. To make the conversation simpler and more generic, if we all "know" that we are going to reflate and then we don't, the portfolio might get hit badly. Obviously the market very often confounds what everyone "knows" will happen.

One outcome counted on is a weaker dollar. There is no convincing me that a dollar bull case makes sense. I have been a dollar bear for a long time but that did not stop the dollar from having a massive risk aversion rally a few months ago. I am not predicting that now but if it happens, I say if it happens, Matt's portfolio will get whacked painfully. Matt clearly says this should not be 100%, 50% or even 25% of someone's portfolio but that sort of warning sometimes gets lost in the weeds.

David Rosenberg thinks the S&P 500 will take out its March low "because consumer spending hasn’t shown signs of a recovery," hat tip Barry. Fantastic.

Comments

[Clamdigger:]

Roger, thanks for sharing your work and observations on investing and life.

May 22 02:05 PM

[Roger Nusbaum:]

thank you for the kind word


On May 22 02:05 PM Clamdigger wrote:

> Roger, thanks for sharing your work and observations on investing
> and life.

May 22 02:37 PM

[pdwst33:]

Get this jacka-- above off the site.

May 23 09:53 AM

[searcher:]

Retain the troll's spoor on, but no FUP's, as a reminder of the 'diversity' out there.

May 23 10:57 AM