Newswires explained that expectations of central bank interventions propelled the stock market to its best one-day performance in 2012. Specifically, investors ”hope” that the Fed will enact additional easing measures to stimulate employment stateside and they “hope” that the European Central Bank (ECB) will serve up efforts to tame the region’s debt dragon.
Yet these rumors have been in play for weeks. In fact, the only tangible evidence from the ECB on Wednesday was a pledge to keep rates steady; a rate cut did not follow the lead of Australia as many had “hoped.”
So what are the real reasons for the surprising rush into equities? First, bearish short-sellers sold their positions after an aggressive campaign had pushed equities 10%-25% off recent highs. Not surprisingly, then, the hardest hit sectors/countries experienced the greatest bounce.
|Worst to First? Only When The Short-Sellers Collect Their Winnings|
|Approx 1 Month %||1 Day %|
|iShares MSCI Poland Index Fund (NYSEARCA:EPOL)||-11.4%||5.4%|
|Market Vectors Russia (NYSEARCA:RSX)||-10.1%||4.6%|
|WisdomTree India Earnings (NYSEARCA:EPI)||-6.6%||4.2%|
|iShares MSCI Spain (NYSEARCA:EWP)||-10.6%||4.1%|
|First Trust ISE Revere Natural Gas (NYSEARCA:FCG)||-8.2%||3.9%|
|SPDR Oil & Gas Expl/Prod (NYSEARCA:XOP)||-8.3%||3.9%|
|Market Vectors Steel (NYSEARCA:SLX)||-13.3%||3.4%|
|S&P 500 SPDR Trust (NYSEARCA:SPY)||-3.7%||2.2%|
|First Trust Morningstar Dividend (NYSEARCA:FDL)||0.5%||1.5%|
|Vanguard Utilities (NYSEARCA:VPU)||2.5%||1.2%|
Energy-rich Russia and oil exploration/production companies have contended with waning demand in Asia as well as recession-wracked Europe. What’s more, funds like RSX, FCG and XOP had earned their respective spots on the ”Most Oversold List.”
Nevertheless, it’s difficult to see how - in the absence of improving global economic data - energy explorers or exporters can thrive. Long-term? They may be some of the best investments on the planet. Short-term? Very little has changed.
That said, a risk-on rebound could last longer than anyone anticipates. Witness the remarkable run for treasury bonds over the last 10 weeks.
In truth, the most attractive investments amid the current uncertainties may be those that: (a) declined significantly less than the overall market in the May-June swoon, (b) offer historically attractive yields relative to comparable treasury bonds, and (c) logged price gains during today’s melt-up.
By the same token, there’s one asset class that has been more remarkable than nearly any other: Mortgage REITs. These trusts purchase mortgage debts as investments, rather than income-producing property, and it is not uncommon to see “mREITs” paying 10%-plus.
Consider the success of the exchange-traded tracker, iShares FTSE NAREIT Mortgage REIT (NYSEARCA:REM). With respect to the above-mentioned criteria, REM’s top-to-bottom decline was a fraction of the broader U.S. market at a -4.0% drawdown. REM has a 12-month yield of 11.5%. It also closed today at its 52-week peak.
While iShares FTSE NAREIT Mortgage REIT (REM) tracks a more established index, possesses greater dollar volume liquidity and has a longer track record, Van Eck’s Market Vectors Mortgage REIT Income Fund (NYSEARCA:MORT) is another alternative. MORT may be little more volatile on the downside due to “trade-ability,” but it relies less on the performance of American Capital Agency Corp. (NASDAQ:AGNC). Whereas MORT has a 10% weighting, REM has a 20% weighting in American Capital Agency Corp.
Mortgage REIT ETFs are not immune to systemic risk. Back in 2008, REM lost nearly half of its value.
Granted, Europe’s sovereign debt troubles are not the same as the sub-prime/Alt-A mortgage disaster from four years ago. Still, it is critical to know exactly how to protect yourself before a financial collapse adversely impacts positions that you hold.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.