by John Nyaradi
A September taper by the Fed now looks more likely than ever. When it gets to the point when even one of the "doves" on the FOMC – in this case, Chicago Fed President Charles Evans – states that the FOMC, at its September meeting, might decide to taper the Fed's bond-buying, the careful investor should plan accordingly.
Evans went on to note that the FOMC need not wait for one of its scheduled monetary policy meetings in order to announce the taper. A "spontaneous taper" could begin at any moment. All it might take would be a development such as the four-week moving average of initial unemployment claims' dropping to its pre-recession level. Oops! That just happened last Thursday! Keep in mind that the Job Openings and Labor Turnover Survey (JOLTS) for June from the Department of Labor's Bureau of Labor Statistics disclosed that the number of job openings increased in June to the highest level in five years. The report also indicated that less people were fired in June than at any time during the past five months.
Although a good deal of attention has been given to recent "pro-taper" statements by many Federal Reserve Board members who do not vote on monetary policy, enough voting members of the FOMC have indicated that the taper could begin in September to cause the prudent investor to take heed.
As the Federal Reserve reduces the pace of its bond-buying, Treasury yields are expected to rise. Look at how much they have risen since Ben Bernanke simply raised the subject of cutting back on bond-buying last May. Higher Treasury yields will mean higher mortgage rates and higher mortgage rates cause a slowdown in home sales. We have already seen homebuilders' stocks take a drubbing since the taper has been discussed. Home sales also trigger sales of appliances, furniture and literally the kitchen sink.
A slowdown in the Fed's bond buying will also tighten the money supply. It will likely be harder for consumers to get loans, raises, promotions and – let's not forget – jobs. Since the American economy is seventy percent consumer-driven, a tighter money supply would likely result in lower top lines on those quarterly earnings reports, which are so important to stock prices.
Are you ready to re-adjust your portfolio so that you can continue to profit during a September taper? What follows is a list of leveraged ETFs that might help prevent your net worth from being tapered along with the Fed's bond-buying program.
ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) – This ETF Is designed to obtain daily investment results which correspond to two times the inverse (-2x) of the daily performance of the Barclay's U.S. 20+ Year Treasury Bond Index. TBT invests in derivatives that ProShares Advisors believes, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the Barclays U.S. 20+ Year Treasury Bond Index.
Direxion Daily 20+ Treasury Bear 3x Shares ETF (NYSEARCA:TMV) – This ETF is designed to obtain daily investment results of 300% of the inverse of the performance of the NYSE 20 Year+ Treasury Bond Index. TMV creates short positions by investing at least 80% of its assets in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the NYSE 20 Year+ Treasury Bond Index.
ProShares UltraShort 7-10 Year Treasury ETF (NYSEARCA:PST) – This ETF Is designed to obtain daily investment results which correspond to two times the inverse (-2x) of the daily performance of the Barclays U.S. 7-10 Year Treasury Bond Index. PST invests in derivatives that ProShares Advisors believes, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the Barclays U.S. 7-10 Year Treasury Bond Index.
Direxion Small Cap Bear 3x Shares ETF (NYSEARCA:TZA) – This ETF is designed to obtain daily investment results of 300% of the inverse of the performance of the Russell 2000 Index. TZA creates short positions by investing at least 80% of its assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the Russell 2000 Index.
Bottom line: Leveraged ETFs will move fast (for or against you) and you need to read the prospectuses to fully understand how they operate before venturing into these volatile waters. However, for the informed investor / trader, the taper combined with leveraged inverse bond ETFs could provide exciting opportunities as September approaches and the taper gets underway.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.