Is the money printing and recession ever going to end? Are stocks a good hedge against inflation? Are the people in charge of our nation's finances truly competent or are they the same people who got us into this mess in the first place? Many questions loom ominously in the minds of traders and investors who have to decide whether or not they want to fight the Fed this fall.
One thing is certain this election season, if the economy needs more stimulus, Bernanke will print more money. There is no precedent for the amount of backstopping, reserve creating, bailing out, and backslapping that has been going on since 2008. It seems that our leaders cannot stand an equity market correction, and will absolutely not tolerate one during election season (even Bernanke is worried about his job it would seem!).
Just like the last time QE was announced, we expect commodities to outperform stocks but this time we think the package will be less effective in driving the right asset prices significantly higher (namely stocks and housing prices). That's because commodities (stuff) are priced in dollars and when the FED prints more dollars, the existing dollars are diluted and buy less stuff. This inflation in the face of a troubled economy simply makes things worse for most people and does little to create any job growth. In other words, Quantitative Easing is really just a nice way of saying "Currency Devaluation."
During currency devaluations, it is always a good idea to hedge your risks through owning commodities, foreign currencies, gold and silver, and some stock. Here are a few names we like for the coming melt-up-a-thon which is sure to make economic inequity in America even worse in the coming months. (In case you were wondering, I don't think QE3 will help the little guy, but I digress)
Spider Gold Trust (GLD) -- The problem with owning gold right here as that the wise traders are already sitting on the sidelines with profits. The big boys bought the QE3 rumor and sold the news. Despite the short term profit-taking expect the GLD to outperform stocks during this latest round of printing.
ETFS Physical Silver Shares Trust (SIVR) -- This physical silver offering SIVR holds significant benefits for silver traders because the options on SIVR are relatively liquid. Buying in the money SIVR call options seems to be a great bet on QE hitting the metals markets. SIVR is not like the Sprott offering (PSLV) because you can't redeem in actual silver bars, nevertheless SIVR doesn't have the premium issues with the Sprott closed end issue PSLV. I like the deep in the money December $25 call options which carry just a small one or two percent premium versus owning SIVR directly. Remember, GLD and SIVR don't pay any dividends so owning in the money call options seems like a better way to invest in the ETF given the built in stop loss at $25 that this trade gives you.
Market Vectors Agribusiness (MOO) -- This index fund is a good hedge against food inflation. Investors who think agriculture is a good way to protect against money printing can look toward MOO for diversification. I think Jim Rogers is right, expect to see this fund double over the next decade and possibly rise even more -- at just 10% annual compound interest, an investment doubles every 7 years. Market Vectors Agribusiness looks well poised to outperform the rate of inflation.
Chevron (CVX) -- "If you can't beat 'em, join 'em" or so the saying goes... Most Americans feel the same way about oil companies as they do about chugging castor oil, but that doesn't mean that Chevron is a bad investment. In fact, this hated company in the most hated industry (rightfully so of course) is still relatively cheap at around 8.72X forward earnings and 9.38X forward earnings. Of course, we have been bullish on CVX for years because we realize the sheer size and economy of scale this business has makes Chevron a business with a fairly wide economic moat. Throw in a 3% dividend yield and a covered call overlay, and you have a pretty solid long-term investment holding.