More Alternative Asset Allocation Strategies To Protect Against The Looming 'Taper Syndrome'

by: Tim Gallagher

U.S. Latin Imprimitus

There's a reason that the major U.S. market indices were down last week, having just taken the worst weekly hit throughout 2013. Trumping the fair-sized amount of company-specific earnings disappointments, the Federal Reserve did not get a "tweet" of approval from Mr. Carl Icahn. I doubt if it will. While tapering is inevitable, like death and taxes, rampant speculation is dominating and reverberating through the entire global marketplace.

While speculation on when tapering will start, how rapidly or slowly it will commence, when it may end, its potential effects (down to the "5th or 6th derivative" trades), all of the strategists and money managers who put forth the idea that the markets have factored in the Federal Reserve's "exit strategy" of terminating its monthly massive asset purchases are maybe partially right. The bond market may have accurately valued and discounted this program's ramifications to a fair extent, but the stock markets have demonstrated otherwise. Both last week and the May-June 2013 "mini-correction" are the visible evidence.

Federal Reserve Bank

As long as this macro-scenario is a looming reality, I will put forth a series of tactical and strategic moves into alternative asset classes and non-correlated "pairs trades," international markets via domestic U.S. equities, and other methodologies in a series of subsequent reports, all designed to 1) reduce risk directly related to tapering and interest-rate risk, and 2), to potentially generate Alpha, while also reducing Beta.

My first article on portfolio strategies designed to cushion investments from interest rate risk and add a larger market-neutral position to reduce portfolio volatility is available here.

This article contains many stock-specific long and short ideas, many of them in a pair-trade strategy designed to avoid incurring capital gains and share appreciation losses that many income (i.e. yield) investors undergo while the income growth and dividend-oriented investments get revalued by the market who view them as such, and consequently discount these issues and sectors for the foreseeable likelihood that they will have their purchasing power, via income, eroded by rising real rates. This phenomenon is not an equal trade-off, as a holding designed to generate a 4-5% income yield can sell off by 12-25%. Please realize that, and act to remove that real risk, and very likely reality.

A suitable place to start is to mention what to avoid, as much as I hate to exit some generally great asset classes, REITs being suspect #1. I have held this class for over 20 years, and even in major corrections, I merely increased this investment when the clouds of dust started settling. In my opinion, this is the exception. I will miss the income and the diversifying characteristics that REITs inherently add to a portfolio, but unless the individual investor is dependent on the income streams to meet living expenses, and can realistically withstand and undergo some potentially sheer share value depreciation for a possible 2-5 year duration, there are other income streams that can replace the distributions from REITS. Until, and unless I see indicators that support an opposing thesis, or fellow investors can present solid evidence disproving my position, I'm resigned to avoid this class for some time.

Avoid the homebuilders for now, but keep an eye out to buy lower in the short term, possibly the next 1-3 months. Homebuilders are selling at low valuations, having ceded the leadership sector role earlier in 2013, and radically dropping 30+% in some cases. They remain a value trap, even as home buying and sales fundamentals have been a solid sector, despite higher trending interest and mortgage and refi-rates. Homebuilders will become cheaper. Later is the time to invest at very compelling values.

I'm holding my long term utilities positions, and may add to them at or near their respective 52wk. lows, and likewise with telecom positions, but I'm avoiding any new positions. I'll attempt to make up for it when the taper risk is off, by adding a utility sector mutual fund to boost individual company stock positions with this kicker to income generation.

U.S. Federal Reserve Board Chairman Ben Bernanke

U.S. Treasury bonds, notes, TIPS, and bills: Investors are prudent to hold off on new purchases until some visible stability as to tapering, and its effects on yields are reached. Again, with the proviso that income-dependent investors with a risk-averse demeanor can decide what allocation is needed, whether to roll maturing bonds into the higher yields that will be offered, and the duration, or possibly a shifting of bond qualities (i.e. corporate, junk, floating-rate loans, etc.) are optimal in meeting the individuals' needs.

Avoid Treasury Inflation Protected Securities (OTC:TIPS). The largest corporate investment grade debt-based ETF, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD), now offers a 4% yield, not bad during a growth rate of 1-1.5% GDP, and a 1% non-existent inflationary trend. The 10yr. U.S. treasury is yielding 2.882% as of August 20th, its highest yield since July 2011.

Laddering short term "risk-off" cash into T-Bills in three month increments provides some safe predictability, and should incrementally enhance returns on cash allocations. I'm personally planning to do this with about 5-7% of my income for the duration of the "Taperworm."

For those investors unfamiliar with the laddering strategy, it simply entails a plan to buy T-Bills in three month increments, so: 3M, 6M, 9M, 12 M, and, upon maturation of each tranche (with the 3M tranche being first up), and rolling these over into 12M instruments as each 3 month lot matures. This serves to incrementally pick up yield, yet keep cash near at hand, with three months being the longest span before cash can come available. It should go without saying that individuals should always have instant access to cash, so please don't ladder 100% of savings. Instead, and in conjunction with laddering, a minimum of three months' worth of emergency reserves should always be on tap.

^TNX Chart

S&P 500 Chart

S&P 500 data by YCharts

^SPX data by YCharts

Note the % changes in bond yields, and the rapid trajectory and sudden increase in yields. The cost of money via accessing the monetary money supply in the form of loans is clearly both rising and "sticking" to quoted interest rates.

Now that the cash and liquidity/savings portion of the balance sheet is put to work, it's time to move to the performance and future outlook in financial investment "risk-on" instruments. The first order of business in running away from interest rate risk is to find what and where to run to. I want to dampen risk and volatility and generate par-equity performance or outperformance. Let's look at the hard assets, metals, and mining sectors. These investments are largely cyclical, and have the potential to turn into strong outperforming Alpha-like returns. They have been shunned, divested of, and stunning, losing businesses and commodities lately, with gold, copper, silver, and the miners that produce them falling to the wayside.

Not only is considering this investment class now an intelligent contrarian play [the famous Wayne Gretzky's, "Hit 'em where they're not" philosophy], they inherently tend to outperform both at the end and beginning phases of each business cycle, thereby serving to carry the water when stocks and bonds rest and lag. The third positive aspect of permanently allocating a portfolio's holdings to these assets is the retreat to them during uncertain, risky, "fearful" times, and they are generally non-correlated to equities and bond assets. The extensive chart assortments presented ["death by visual aid"] that readers see below will fully demonstrate this outperformance, these assets' current trend, and a strong inverse correlation these assets possess, as opposed to the broader domestic U.S. financial market indices.

The Hard Assets-Metals & Mining Class and Sectors

First, a closer look at the broad U.S. equity and bond markets, via each class's benchmark indices, as well as the CBOE Volatility Index [VIX], better understood as the "Fear Gauge." The charts below show the performance (and VIX levels) throughout the 2008-2013 current period, with the increase of volatility and underperformance starting in the stock and bond assets. This combination has noticeably increased since the word "Taper" became a looming presence in the markets, and on the minds of most investors. Just take a look at the amount of articles that are addressing this phenomenon on Seeking Alpha, as well as any cable, TV, newspaper and online media outlet on the planet. That confirms the gravity of the risks implied by the massive $85 Billion per month that the Federal Reserve provides as liquidity and stimulus to the finance market, and the U.S. and world's economies.

^SPX Chart

As the next FOMC Meeting is set for September 17th and 18th, the Fed may have some strong positive economic data to move on commencing the tapering process, or "Releasing the Kraken" in many money managers' eyes. This large liquid largess has allowed the financial markets and the professionals within it to operate in (synthetic) full recovery mode, achieve return outperformance, lend to business and individual borrowers, and revive the wealth effect as a stimulus to our economy. It has also had an inestimable beneficial and detrimental effect to many other global markets.

Kraken Unleashed

VIIX Total Return Price Chart

GDX Total Return Price Chart

GDX Total Return Price data by YCharts

^VXD Chart

^VXD data by YCharts GDX Total Return Price data by YCharts

GDX Total Return Price Chart

Many market movers and shakers have grown dependent on the safety of its liquidity insurance, and fear the potentially negative, and possibly devastating, consequences of losing this huge cash inflow. After all remember, such a huge and original undertaking in macro-financial engineering has never been undertaken before. What will it end up doing to the market?

Last week, the week ending August 16th, was the worst week for the U.S. stock market so far in 2013 as measured by the Dow Jones Industrial Average [DJIA]. This has been largely attributed to the gradual improvement in the U.S. economic data, implying, or inferred to point towards a near-future commencement of asset tapering. That's why the VIX has increased, and the former strength of the domestic stock markets have possibly begun a taper-induced correction, as bond yields have really risen quickly in anticipation.

Coincidental to the market volatility has been some China economic data, reflecting trends that have hinted at its increased demand for steel, iron ore and copper-all the industrial metals that have been playing dead for the past year. Another recent statistic has made clear that both the Chinese and Indian populace have increased buying their favorite asset and traditional store of wealth, gold, by between 71-81% YOY during Q2 2013.

These statistics and trends bode well for the commodities and its industry, as well as the nation's most heavily enriched with these natural resources, and they are levered to commodity production, costs, and sales.

Europe has also recorded some signs of economic recovery and stability, much awaited and desperately needed, and its nations' markets have rallied in cheer and optimism. We'll touch on all of these themes further on.

Now we get back to the hard commodities and mining industry. As the news of these sudden international strengths and greater demand has spurred the miners, they have also rallied in an impressive and sudden show of force. They have been passed the figurative Olympic torch, as the following charts portray. This is a great time to increase or initiate exposure and direct investment to the metals and mining sectors. The derivative industry that moves these heavy shipments are the rails and ships, hence the correlating recent strength in the Dow Jones Transportation Average.

^SPX Chart

This near-inverse correlation and outperformance of the PM and industrial metals, and their miners, can be further demonstrated by the impressive resurrection and outperformance of a chart depicting a broad swath of major miners and/or processors and fabricators, across copper, gold, iron ore, silver, and steel. These giants also mine the by-products of platinum, palladium, and other metals and minerals, and alloys.

BHP Total Return Price Chart

BHP Total Return Price data by YCharts

The Global Miners and fabricators have been on fire! These companies are undergoing a new lease on life, and are producing asymmetrically outsized returns and share appreciation. Along with that comes the ability to charge higher prices to consumers due to the recent rising demand, justifying both higher after costs production price increases, and some delayed capital expansion projects to be resumed. Another derivative beneficiary will be the capital equipment manufacturers that sell mining goods to mining companies, notably Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY).

The railroad companies like Norfolk Southern (NYSE:NSC), Union Pacific (NYSE:UNP), CSX Corporation (NYSE:CSX), Canadian Pacific (NYSE:CP), Canadian National Railway (NYSE:CNI), Genesee & Wyoming, Inc. (NYSE:GWR), and the engine manufacturer General Electric (NYSE:GE), as well as the railcar makers American Railcar (NASDAQ:ARII), Greenbrier (NYSE:GBX), Trinity Industries (NYSE:TRN), FreightCar America (NASDAQ:RAIL), and the others will have positive sales and earnings revisions due to this resurgence. The coincidental strong auto sales cycle from Ford (NYSE:F), General Motors (NYSE:GM), Toyota Motors (NYSE:TM), etc. will add metals demand to the business books as well. There are plenty of beneficiaries in these interrelated cycles, they just bear searching for, and doing due diligence on.

An observed anecdotal tidbit that I've noticed here on SA recently, being there has been a decrease of positive articles and commentary on gold visible over the past 2-3 months (until August 18th), a contrary indicator in and of itself.

Whenever I write and present investment themes and opportunities, or give advice to friends, I attempt to keep uppermost in my mindset the large, unknown experience, needs, preferences of the readers and investors. There are multitudes of varying levels of means and knowledge that subscribe to Seeking Alpha and its cohort, and I try to suggest a range of alternatives to give many investors a specific recommendation, a theme, observation, or simply education and a comfort level to at least consider what may once have been perceived by an individual as "too risky."

Investors also materially differ by levels of sophistication and education, designation, destination and goals, experience, income level, risk adversity, investment duration/"longevity" span (i.e. can I take a risk, lose big potentially, and survive? Am I even willing to try?), capital and discretionary spending power, tax burdens, overall investment allocations, familial obligations, debt levels, and debt-servicing ability, etc.

As a result, I suggest a range that hopefully will be acceptable and/ or possible for the majority of readers. I also try to aid in defining the risks likely, possible or perceived with each idea. Hopefully this helps the majority of readers.

For my range of metals and mining, I suggest that investors without an allocation in these assets start with a permanent 4-6% percent of a portfolio held among this broad sector. Others may keep 10-13% across this class. Becoming familiar with the cyclical performance of these investments will allow a shifting among the various classes. For instance, coal is tied to the steel industry, but hampered by politics and regulations, as well as lost market share due to natural gas, iron ore pellets, steel mill arc (electric) furnace steel production, natural gas, solar, and nuclear energy for heat and power-any number of difficulties. But these factors and headwinds all can change, and they often do, so coal isn't dead, it's just in a downtrend. Watching for more favorable news to come may allow one to catch a new growth curve early, shift into a coal play, and realize large profits. This is true for every investment.

I've increased my ownership in Gerdau (NYSE:GGB), Steel Dynamics (NASDAQ:STLD), Cliff's Natural (NYSE:CLF), and reinvested into Newmont Mining (NYSE:NEM), and the two years that I held and bought GGB and CLF at historical lows (merely a few months ago), have been paying me back with 24-Karat Alpha!

Shifting up to 10-17% into assets makes sense for the knowledgeable and more risk-tolerant investors. I've been as high in as ~22%, and am comfortable there for whatever support level or opportunity I see at those times.

I almost always hold gold and/or miners (more often), but had been out of all mining positions from April 2012 until this May, scaling into NEM $at $33.00+/-. It had declined as low as the $26.42 area, and now is back to my reinvestment price.

Gold has its own unique properties, and a mix of physical gold, miners, and ETF or mutual fund shares can comprise one's allocation. Silver is much more volatile, and usually travels in gold's direction, just much more violently. For some extra alpha, maybe own both PMs at a 2:1 ratio, gold to silver. A more conservative ratio would be 3:1 or 4:1.

Let's drop the metals and go do some globe-trotting world-traveling together. Let's jet over to "Europa."

Global World Burst

EWU Total Return Price Chart
(Click to enlarge)

EWU Total Return Price data by YCharts DFE Total Return Price data by YCharts

The International Markets

Let's start with any approach and consideration of each individual investment with the proper priority consideration, the rational approach, and address the most important subject every time, which is RISK.

Just consider the world we live in as it stands today. Nearly the entire world is a subject of the largest historically massive monetary and austerity "Stimulus Experiment" anyone has ever been witness to. We have yet to find out if "we" will be either victors or victims of the final outcome of this global deleveraging "repair work."

I think that Ben Bernanke is a learned and thoughtfully sophisticated individual, and his career background was dominated by intense study and expertise of the American "Great Depression," so I believe he's in the ballpark when it comes to the implementation, execution, oversight, and exit strategy for landing us safely. I think he spends a considerable amount of time, focus, and energy with this program on his mind 24/7. I'm confident that Mr. Bernanke heavily and carefully weighs every consideration, implication, ramification, and possibility of the Federal Reserve Board's actions and plans prior to deliberating any single move.

Similarly, I have "some" confidence that his transnational colleagues may also eventually get us back on safer terra firma. After all, they did enact the "Marshall Plan" with success. But they also started World Wars I and II, Communism, the Holocaust, Russian Revolution, and "The Bomb." I hope that this massive global stimulus doesn't turn out to be the ultimate financial bomb.

Then there all the other macro-situations that are our backdrop and heavy underpinning risk factors: U.S. stimulus (and Exodus), E.U. / eurozone austerity, stimulus, debt and unemployment, China's financial engineering dominating its approximately 1.3 billion citizens, as well as its dominance for global resources as the Giant Dragon awakens from its dormant phase in the developing world. China aims to fly in to become the contender for Superpower Number One.

In Japan we now have "Abenomics" on a scale rivaling both the U.S. and E.U., another experiment in "Economics 301." India has gone from the "I" in the powerhouse "BRIC" nations to another house in a more dilapidated neighborhood. It is burdened with simultaneous political corruption and instability, economic issues, a devalued Rupee, a large poor populace second only to one, and additional social issues and unrest.

Unfortunately it's not surprising at all that the Middle East is hot and getting hotter, with Egypt now in the fray in a big way. Africa's many troubles are merely a steady low rumbling, but Brazil has monetary and social issues as well, and Chile, Argentina, Venezuela, Colombia, and Peru, are trying to keep up in all regards. Let's not forget to consider another hot potato for the Middle East/Arabic world-America is now a clear and present danger to its main lifeblood-oil and petrol-products.

The USA has just turned a major corner, as it hit an inflection point of critical mass, becoming a net exporter of hydrocarbon energy, not the largest importer it was recently, and has historically been since the '40s or '50s. OPEC has a huge and growing dilemma that may be heading towards a crisis. There is fear and uncertainty everywhere we turn. In short, global instability and risks galore abound. How do we even survive?!

Investor Alert-Please stay tuned for more updates ...

This global macro-picture is a Picasso. "Pandemonium Risk" exists wherever we turn. On the other hand:

The larger, more developed European nations have not only been outperforming the USA during the past one month to six weeks, they also demonstrate a non-correlating "zigzag" pattern vs. the U.S. This outperformance may just be short-lived though, as there is a strong likelihood of an "echo-effect" that Western Europe feels the reverberation of whatever effects the U.S. Taper will inflict on U.S. monetary and financial assets. They almost always do.

Two important factors that currently remain both in America's favor, as well as potential headwinds that may negatively impact both investment capital inflows and trade into the United States; a strong $USD currency ("FX," or Forex trade), and asset performance or outperformance in Europe and other regions.

Below is a chart of various short term European indexes. This chart predominantly shows the Eastern European nations, the more recessionary and debt-laden nations (facing the most severe austerity and unemployment), with emphasis on the "PIGS' nations, namely Portugal, Ireland, Greece, and Spain.

EWG Total Return Price data by YCharts

EUFN Total Return Price Chart
(Click to enlarge)

Some of the companies among the PIGS currently trade at mere 3x-5x P/E ratios. These extreme multi-generational low valuations are in a range that makes even the riskiest of companies and country/regional "trouble-spot" asset-classes offer huge potential long-term reward upsides. Studies have shown that assets purchased at these "dirt-cheap" prices tend to generate outperformance ("ALPHA") for several years to come, following an investment at these valuations.

DFE Total Return Price Chart

I generally maintain a core international portfolio percentage and shift between 20-40% across the regions. A lower range held is generally due to increased real or perceived risks, as has been the case over the past few years, but I offset that divestiture by holding a higher percentage of U.S. companies that have a larger business mix, revenue, and earnings that come from its international businesses.

Europe as a whole, presents another recently non-correlating region in the international markets, it's cheap and in the early recovery stages, and stocks are at generational-extreme low valuations. They're performing well now.

Don't fight the trend. Scale (back) into the entire European-E. European-Mediterranean region via individual stock selection, mutual funds, and/or ETFs or ETNs, or use a combination, as I do, to invest in the most compelling companies and countries, while hedging my performance and gaining broader diversification via a good mutual fund manager. Also recognize that the Eastern European bloc has benefited during the entire recessionary period. Poland is now Germany's largest trading partner, and Hungary and the Czechoslovakian areas are faring well. Due diligence into E. Europe may present investors some potential above-average rewards in the future.

Range recommendations for Europe are: 7-17% stocks, and also consider the European sovereign and / or investment-grade corporate debt market: 3-6%. Income investors may want a larger 6-12% position, but remember that most European companies have larger dividends and payout policies, as they are oriented to a yield-oriented shareholder base.

EWU Total Return Price Chart
(Click to enlarge)

EWU Total Return Price data by YCharts

Note that investors can select investments that overlap in diversification and allocations. For instance, a steel factory or gold mining company like Anglo American Plc. ADR (OTCPK:AAUKY) in England can meet both allocation preferences of increased international and commodities' exposure.

EUFN Total Return Price Chart

EUFN Total Return Price data by YCharts

Any investor in any country that holds more than 80-85% of financial holdings (net of homes and/or businesses) is taking on both the risks of concentration, or non-diversification, as well as opportunity risks/costs, an exception potentially being bonds and/or currency exposure. This may be necessary for political or legal reasons, tax purposes, or sovereign safety and strength, an example being a retired U.S. investor depending on U.S. Treasury bonds and (resident) state and local municipal bonds, or real-estate and property holdings, or rental income.

Let's head for Asia.

EUFN Total Return Price Chart

Asia & The South Pacific/Pacific Rim Regions, "The Pacific Dragons"

I view and classify the current Asian dynamics right now into four categories: China, Japan, and the emerging markets story. That's not to leave countries that many consider "developed" out of the picture. Countries such as Australia, Korea, Taiwan, Hong Kong, Singapore (with an "A-rated" Sovereign Debt credit rating), and New Zealand are independent and stable nations that encourage investment, and they have established industries and trade, as well as the infrastructure to function independently, meaning established consumer-based economies.

The majority of Asia rides on the health and strength of China, as do many commodity-driven, resource-rich nations and exporters. Those nations will feed on the "wake of the whale," and that's why I have included Australia, Brazil, and Mexico in one of the accompanying Asian charts.

Other countries that will also benefit from Chinese growth are Canada, Europe, the Middle East, the Philippines, many Latin American countries, Africa, and the USA.

China also trades heavily with Europe, its largest trading-bloc partner, and the USA, even though reporting consistent trade imbalances, still maintains a large export figure to China. Companies based in any of these countries will benefit in scale.

EWA Total Return Price Chart
(Click to enlarge)

EWA Total Return Price data by YCharts

Japan-"Land of the Rising Sun"

Japapense Face of Abenomics

Japan's an experiment, much like the U.S. and the E.U., except the number three economic engine (moved over by China), has had a deflationary twenty year nap. "Abenomics" may go either way, but at least they're taking some large measured actions to avoid going into a coma. The TOPIX and Nikkei Indexes are volatile, with 3-10% ups and downs in as little as a week, but a gradual scaling into Japan, with an eye on the news and data, investors can cautiously increase at any pace. One thing's now for certain, money won't go there to die anymore.

I recommend a 2-3% allocation, 5% for a more daring, or more intimately knowledgeable investor familiar with the country. As news and economic data point toward an improving economy, increase by 1-2%.

"The Crumbling Yen"

The Japanese Yen is a major focus of the Japanese government monetary intervention and Abenomics, in the hopes of maintaining Yen weakness relative to the other major Forex [FX] currencies, namely the $USD, the E.U.'s Euro [EUR], the U.K. British Pound Sterling, and the Chinese Yuan [CNY]. This is aimed at stimulating more sales of Japan's many businesses and huge conglomerate giants' collective products and services, as well as to encourage domestic spending and investing.

Investing in Japan is best done by implementing a strategy to keep real gains by hedging Japanese positions against Yen weakness and hurricane-like volatility. While I don't endorse any specific products, an effective strategy is consistently executed via the WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ), and the db ex-Trackers Japan Hedged Equity Fund ETF (NYSEARCA:DBJP), included in one of the provided charts' comparisons.

The Land of the Rising Sun also has enough volatility and macro issues for short and intermediate term trades, or for trading around a core holding position for incremental returns.

Euro to Japanese Yen Exchange Rate Chart
(Click to enlarge)

Euro to Japanese Yen Exchange Rate data by YCharts

This entire region, and the underlying promise and potential that many Asian nations possess, are in different stages of realization of each country's respective resource wealth. I always hold a generous (or at least, a "market-weighted") portfolio allocation among Asia. I'm waiting for more strength via an economic recovery play out in this region before making more country-specific and company-specific bets.

For now, I'm generally avoiding or underweighted in all of the "Frontier Markets," as well as Malaysia, Indonesia, and India. In fact, I'm considering short plays on Malaysia, but particularly on India, a new view from my longer term, optimistic, bullish outlook.

On August 19th, reports have noted that the Indian Rupee is at an all-time historical low, in terms of relative currency strength versus the $USD. That, and India's other troublesome multiple "Stagflation-like" issues, are stalling and retarding economic progress.

If India can successfully remove one or two of its national problems from its future outlook, namely a favorable election and an enacted business-friendly reform program, and Rupee stabilization, I'll look to make a contrarian bet with a position taken at these low levels.

I'd rather be in the developed Asian "Tigers," Singapore, Hong Kong, Taiwan, Korea, Malaysia, and Australia and New Zealand, all to invest indirectly into Chinese growth. I'll also add to Indonesia incrementally, only scaling up after good economic trends emerge. Indonesia is continuing GDP growth at the 5-6% rate per annum that it has for some years.

EWM Total Return Price Chart
(Click to enlarge)

EWM Total Return Price data by YCharts

It's important to note that the world realizes 50% of total world gross product spending is derived from the emerging markets, yet another supporting reason to assume some of the risk factors that come from some allocation into this asset class.

I'm avoiding India, and looking to make a short play via the "Nifty Fifty" Index, because as much potential and promise as there is that awaits there, the second largest nation in terms of population has too many political, economic, and social ills to assume those risks. The Forex shows a historical parity weakness of the Indian Rupee relative to the $USD, exchanging at ~63.2:1 [Rupee: Dollar]. India is struggling with "Stagflation-like" headwinds, so why invest there now, when there are so many alternatives?

One more supporting statistic to go long in gold, by the way, is some recent Asian news. Chinese and Indian consumers have increased their purchases of gold, their favorite, traditional store of wealth, between 71-81% YOY in Q2 2013.

FXI Total Return Price Chart
(Click to enlarge)

FXI Total Return Price data by YCharts

China-The "Giant Fire Dragon"

FXI Total Return Price Chart

FXI Total Return Price data by YCharts

As impressive and as powerfully astounding as China is, I bluntly don't trust the government or its laws and regulations, and less so of its permitted public corporate entities. I have a strong, sneaking suspicion that much of China's economic strategies and investments are fronts for centralized governmental-controlled "economic war" tactical plans by design.

Call me xenophobic, and/or hate me all you want, but at least I make my opinion known, telecast my biased views, and don't hold it personally over any Chinese or ethnically-rooted individual. The culture and feats and entrepreneurial, business, and trading spirits are admittedly impressive, and the collective talent base can be admired, but I still prefer only to capitalize on the rapidly growing world powerhouse through indirect investments leveraged to China's massive and growing demands for …the rest of the world!

Until corporate, legal, patent, copyright, trademark, licensing, and IP laws are firmly and consistently regulated and enforced in the Chinese corporate culture, and trade agreements are adhered to, I won't even touch an American-based Chinese IPO, I never have yet, despite all the trendy sentiment and hype surrounding the Chinese IPO craze, and companies like Renren Inc. (NYSE:RENN), Dangdang Inc. (NYSE:DANG), Baidu (NASDAQ:BIDU), from 2006-2011.

Admittedly, this "bias" and cautionary reluctance has prohibited me from owning some solid businesses, but that is a part of my discipline. After all, why would an influx of these Chinese entities tend to have misleading names, hinting or implying that they are corporations with roots in other nationalities [i.e.; Canadian Solar (NASDAQ:CSIQ)], and also have misleading models and holdings on the balance sheets, in some cases?

Why has this superpower economic machine still managed to "pull" off "third world" stunts, frauds, and scams, that even still never cease to amaze me with their astounding boldness, "brazenness" is a more appropriate adjective. This is extremely odd, coming from a nation with a strong and shrewd trading and negotiating history.


The best time to start shifting asset concentrations and tactically pre-positioning for the possibility of interest rate risks and sensitivity was a year ago. The second best time is now! Strategic shifts don't need to be automatic. They require forethought and planning, and need to take into account the implied risks assumed with any major changes to allocation and international and asset shifts.

Taxes and their implications also must be considered. That being said, gradual changes are the optimal approach, and monitoring of any changes to this thesis may materially change the initial changes decided on. Tapering will most likely have a prolonged and lasting duration, so a two-year estimation of the main duration of decreased "money accommodation" and its impact and results on financial markets is what I'm working with for the time being. Markets do have a discounting mechanism, and once we can wrap our arms as to the initial Fed actions and get a feel for the timing, continuity and scale of rapidity of decrease (and/or adjusted increases or pauses), the market professionals and economists will have more effective models and estimates that will certainly change the timelines and market outlooks. Anyone else's view is just as equally their respective "best guesswork" as well at this point.

Just keep an estimation of the length of duration of investment changes along that general timeline, so investors can take a longish term approach and strategy. Some have speculated that tapering could last for five years to forever! Stay tuned for further articles from me elaborating further, and updating these initial ideas and considerations.

Disclosure: I am long CLF, JOY, NEM, STLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions in this document are for informational and educational purposes only, and should not be construed as a recommendation to buy or sell the stocks and/ or other specific products and services mentioned, or to solicit transactions or clients. Past performance of the companies discussed may not continue as implied, projected, or assumed. Any investment information contained within these materials are not an intention to advise individuals to invest, sell, promote, market or advertise any company or investment products.

These are the writer's opinions, and material facts contained within all the contained and related content may differ materially, is subject to change, and taken from multiple sources. All investors should do suitable due diligence before making any investment decisions as a result of any facts, information, or opinions in this article.