For more than two years, traders have been selling or staying away from European assets. At the same time, they have been buying American assets, especially U.S. treasuries and high dividend-paying stocks. This strategy has been based on two premises. First, the American economy is in a better state than the European economy. Second, the Federal Reserve is determined to drive every single interest rate down to zero, finance Washington's deficits forever, and drop money on Wall Street until the "wealth effect" re-ignites economic growth.
Anyone who follows closely the economic and political developments in the U.S. lately, especially the recent actions by the ECB and the FED, cannot help but conclude that things may have reversed course in the two continents: European Union has been in an advanced stage of addressing sovereign debt woes, while the U.S. has yet to begin. This means that there is a good chance that sometime next year the U.S. will be where Europe was two years ago: Higher Treasury yields, market-imposed austerity, and economic weakness. How can investors prepare their portfolios for this prospect?
Reverse strategy. Buy European assets and stay away or sell American assets. Here are four trades that may serve this objective:
- Stay away from U.S. Treasuries--and Treasury ETFs like AGG, BND, LAG, and TLT. Aggressive investors may want to buy two ETFs that short U.S. Treasuries, Proshares Ultrashort 20+ (TBT) and Proshares Ultrashort 7-10 Treasury (PST).
- Trim Positions in High-Dividend stocks, which are exposed to the Dividend Cliff, the prospect of either a sharp increase in dividend tax rates (from 15 to 43 percent) or a sharp increase in interest rates, as the U.S. addresses the Fiscal Cliff in early 2013-either prospect makes high dividend stocks less appealing.
- Hold on to technology positions, as this industry will continue to benefit from a shift from the PC world to mobile devices like Apple (AAPL), Qualcomm (QCOM), and Cirrus (CRUS); and from an equipment replacement cycle, Applied Materials (AMAT), Teradyne (TER), KLA Tencor (KLAC), Kulicke and Soffa Industries (KLIC), and Novellus Systems (NVLS).
- Buy European assets, either directly or through ETFs like iShares Spain (EWP), iShares Germany (EWG), iShares Italy (EWI), iSahares Greece (GREK), and Currencyshares Euro (FXE).