On Government Liquidity, Social Security and Metals ETFs

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 |  Includes: AAUKY, BHP, CRBI, MT, MXI, RIO, VALE
by: Roger Nusbaum

Charles Biderman has espoused an interesting, if disturbing, theory about whether the Gubment (the Fed, the Treasury or both) have been buying equities (either SPX futures or actual individual stocks) as a way to provide liquidity at a time of perceived need. You can read more complete versions of the story from Alphaville and Zero Hedge.

Basically, Biderman provides a list of data points subject to varying amounts of interpretation. Some numbers are straight forward, like money coming in and out of mutual funds, and some maybe less so, like pension fund activity.

I obviously have no idea whether there is anything to this or not. Biderman concludes that, if true, it "could trigger a major equities meltdown when the government stops buying and even worse, starts selling." Obviously this sort of buying is done in the hope of stimulating natural buying. One part of this that sticks out as being particularly unhealthy (although there are many things) is that if successful it would stimulate natural buying at high prices. This ties in to the emotional response that causes people to buy in heavy after a big move up or sell out heavy after a big decline.

Bruce Krasting has a very detailed breakdown of the latest Social Security data and it is not good. While you need to read the post in full the key take away, in my opinion, is that in 2009 income was less than outgo, which wasn't supposed to happen until 2016. The reason for this seems reasonably clear: there was a huge drop in the number of employed which results in a reduction in what the program takes in. Should there be some sort of huge gain in the number of employed (which would be a very difficult thing to pull off) then this could reverse the trend, but either way it is eye popping.

My take on the future of social security has been the same for a while, which is simply not to rely on it being there. Krasting notes his opinion that anyone with over $100,000 in income should not get paid and he also talks about the inevitability of higher payroll taxes and reduced benefits. It seems like these sorts of things will have to be implemented to salvage it but I would focus more on saving more, spending less and working longer.

Earlier this week, Art Hogan from Jeffries was on CNBC talking about the new Jeffries Global Industrial Metals ETF (CRBI). He made a comment about it being the only industrial metals ETF. While I am sure that the comment can be spun to be accurate -- like maybe it is the only fund whose name specifically includes the words industrial and metals -- it is a tad misleading.

CRBI has six of its top ten in common with the iShares S&P Global Materials ETF (NYSEARCA:MXI) and many big ETF providers have some sort of global or international materials fund (either broad sector fund or narrower theme fund) that is heavy in Rio Tinto (RTP), BHP Billiton (NYSE:BHP), Vale (NYSE:VALE), Anglo American (OTCPK:AAUKY) and ArcelorMittal (NYSE:MT) and these funds all tend to trade very closely together. The composition of CRBI could be slightly different but it will look like the other funds in the space the vast majority of the time. Any of them could lead for a short time or lag for a short time but over a stock market cycle the difference would be very difficult to spot. Client holdings mentioned above are MXI, VALE, and Anglo American.

ETF marketing may now be moving into the realm of hairsplitting if it hasn't done so previously.

WisdomTree has filed for a commodity currency ETF. The company has had some success with some of its currency products and this would be an attempt to build on that success. I have picked on them a lot for filing for a fund for just about every single currency but not following through with too many funds, but the commodity currency fund seems like a good idea and I think they are motivated to make this one happen.

According to IndexUniverse, the currencies included will probably be Australia, Brazil, Canada, Chile, Indonesia, Mexico, New Zealand, Norway, Russia and South Africa. As highly as I think of New Zealand it is not really a commodity country, it is more of an agricultural country. They export things that come from farms, not things that are mined, but maybe that is a po-tay-to po-tah-to thing.