Scott Freeze is the President of Street One Financial, a Pennsylvania-based firm that specializes in ETF/ETP, equities, and options trade execution. Scott has been involved in ETFs from both a trading/execution and a product strategy standpoint since the beginning of the decade. He views Street One's primary role as enabling its clients to construct better portfolios and recapture more basis points that would otherwise be lost in the marketplace, through better trade execution.
Seeking Alpha's Jonathan Liss recently spoke with Mr. Freeze to find out how he planned to position clients in Q2 in light of his understanding of how a range of macro-economic trends were likely to unfold in the coming quarter and beyond.
Seeking Alpha (SA): Welcome back Scott. This has been an extremely eventful quarter with many geopolitical events driving global markets. Before we get down to specifics, how would you characterize your general approach to portfolio building and asset allocation strategies?
Scott Freeze (SF): We continue to have US equities and commodities at the top of the list, but we currently have tight stops in place. We expect the US consumer to remain weak through the first half of 2011, and fear that continued EU worries as well as inflationary pressures on the Fed will dampen the market's luster for the rest of 2011.
SA: New reports are coming in today that there's been another earthquake off the coast of Japan. In the wake of the triple disaster there, are Japanese equities undervalued right now? Has a Japan play crept into your client portfolios in any way?
SF: Japan has bounced from the initial ‘oversold’ condition and has leveled off. We like the iShares MSCI Japan ETF (NYSEARCA:EWJ) and the Global X Uranium (Producers) ETF (NYSEARCA:URA) and see plenty of opportunities in infrastructure plays there - suppliers to the rebuilding process, concrete, heavy machinery, and wood products should all benefit.
SA: Where would you plot U.S. equities as an asset class on the risk curve right now?
SF: We see U.S. Equities and metals (gold/silver) moving up the risk curve as prices reach lofty levels. Probably at a 7 with 10 being the riskiest. We don’t want to buck the trend and just sell, but we are starting to hedge with emerging markets and keeping tight stops on our long positions. As mentioned in our last response, we are also buying nuclear (URA) and Japan (EWJ) as they begin to come back.
SA: Moving over to another volatile part of the world, the situation in Libya and general unrest we've seen throughout the Middle East during the first quarter demonstrate the inherent risks involved in frontier and emerging market investing. Have you decided to underweight these markets as a result of the regional situation or have you put more money to work in client portfolios on the assumption that the push towards democracy will ultimately be beneficial for these markets?
SF: While the situation in the Middle East continues to be unstable, we don’t feel it will be a prolonged negative. We have been long oil since our May 25, 2010 post on Seeking Alpha and feel that the unrest is a short term blip and actually creating some buying opportunities. As counter intuitive as it seems, while we feel inflationary pressures abound, we expect oil to top out here and revert. Inventories are fairly high and a weakening in the global economy will lower demand.
SA: You can't discuss the Middle East without touching on oil. You had mentioned you were bullish during our last interview three months ago. How much higher do you think crude is heading and how did you end up getting exposure (or did you have a change of heart at some point)? Will rising crude prices significantly impede the economic recovery, or will it not be as bad as feared? Are you hedging against rising oil in any way in client portfolios?
SF: A slowly improving worldwide economy has slightly increased demand for oil, while Middle East unrest has exerted huge pressure on price. We have been long for almost a year now, and while prices could continue to edge slightly higher, we think they are close to the top and have very tight stops in place. Prices for related products in the U.S. are beginning to reach an area where the consumer will be impacted and slow the consumer recovery. ETFs such as BNO, USL, DBO and XLE have been our favorite plays.
SA: You had indicated you were long GLD in 2010. Is that still the case, or have you shifted over to silver or other metals? After such a huge run-up, are you expecting mean reversion to begin creeping into precious metals' performance?
SF: Gold (NYSEARCA:GLD) is becoming lofty in terms of its pricing but technicals remain strong for the long term. We continue to recommend a position in the metal for the properly balanced portfolio. We got into the Global X Silver Miners ETF (NYSEARCA:SIL) the Monday after the Super Bowl and we feel it can continue to outperform Gold as long as the JP Morgan situation and position limits are unresolved. Because we expect inflation to start to gain momentum we are still long and have begun to look into (COPX, GGGG, GLDX and CU) I do not expect performance to continue at the unprecedented levels we have seen, but they should continue to be good hedges and outright positions within well-balanced portfolios.
SA: How are you positioning with regard to the situation in the EU? Do European equities remain a bad bet right now? How much are we in the U.S. at risk of contagion from the situation in the eurozone?
SF: There are still some unresolved issues with the Euro debt crisis. We would expect a round of bailouts to hammer the EU markets and weigh on the US markets as well. Until these play out, European equities should underperform a U.S. portfolio.
One ETF, the Global X Norway ETF (NYSEARCA:NORW) (our current favorite for a number of reasons) has been making new highs recently, and we are still bullish on it. Another fund, the Global X FTSE Nordic 30 (NYSEARCA:GXF) has caught our attention for similar reasons.
Currently, expected increases in interest rates in Europe are having the impact of pushing the dollar. One would think any defaults in the EU would cause the dollar to become a safe haven, but I do not see the contagion spreading to the U.S.
SA: What about Norway has you so excited about NORW?
I was specifically looking at NORW for the following reasons:
- After the UAE, Norway has the second largest sovereign wealth fund in the world with $550 billion in assets (Reuters, 2011).
- Norway is the third largest oil exporter in the world (CIA Factbook 2010)
- GDP per capita in Norway is projected to be over $80,000 in 2011, second only to Singapore (IMF 2010)
- Norway has the second highest current account balance (surplus) in the world (IMF 2010)
GXF interests us for the following reasons:
- Benchmark indices for Nordic region countries outperformed both the MSCI All World Index and the Euro Stoxx 50 Index in 2010 (Bloomberg 2010).
- According to the Legatum Prosperity Index, the Nordic countries all placed in the top 6 in the world in 2010
- The region includes exporters of both natural resources (Norway) as well as high-tech goods (Sweden), which adds diversity to the economy of the region (Wall Street Journal, 2011).
I feel that region gives you the European exposure you want, without the toxic assets, and that coverage of that area is lacking. Otherwise it would be a core or satellite in most portfolios.
SA: Last time we spoke you were very bearish on bonds. Is that still the case? Are you still utilizing dividend ETFs as an alternate means of adding yield to portfolios in light of your views on the bond market?
SF: Bonds still look bearish through the year end with Euro concerns in the PIGS and EU rates moving up and what we see as an increase in U.S. rates. Dividend yielding ETFs are still attractive for adding some income, while mitigating some risk.
SA: Name one ETF investment that worked out particularly well during Q1 and one that did not.
SF: PowerShares DB Commodity Fund (NYSEARCA:DBC) is up 24% since we recommended it in the fourth quarter of 2010. We originally expected the dollar to strengthen in 2011 and positively impact PowerShares US Dollar Bullish (NYSEARCA:UUP). UUP is down 4% since the end of 2010.
We have seen significant outperformance through the first quarter but are very wary that a few macro financial events could halt the move and send us lower throughout the second quarter.
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