We think QE Infinity sets a questionable precedent, but we also think more QE will boost some asset prices over the medium term and that hard assets are the vehicle of choice this fall from an investment perspective for your long book.
Due to the fact that the investment banks are essentially given free capital to trade with after selling MBS to the FED, we think they will move some stock around and the overall direction of the market is not as important to us as leveraging into the names that are undervalued and benefit from a perceived or actual weakening of the Dollar due to the monetization of sovereign debt.
While commodities make a good deal of sense in an environment of currency devaluation globally, there will be contractions and slowdowns along the way. We think a long short approach makes a lot of sense but we would look to short individual overvalued stocks as a hedge rather than shorting index funds or making directional bets against the stock market -- most wealthy investment managers can't beat the index so it seems to be a speculative game to short the S&P 500 index funds (SPY) even against a basket of stocks you think are undervalued. Market neutral investing doesn't have to be rocket science to work in practice, but we think diversification and stop loss orders are important over the long run. Also, maintaining your portfolio weightings so that no position accounts for more than 10-15% of your holdings works even when it gets very hard to trim your winners back to your target allocations -- never marry a trade.
With currency devaluation, people eventually start looking at cash as literally burning a hole in their pockets. While a slowdown in China, a recession in Europe, or a hiccup at home will cause some turbulence along the ride, the general direction for most hard assets looks to be up. The big banks made huge profits during QE1 and QE2 and we think big bank stocks that haven't already doubled from their 2011 lows make sense here as well, however it is clear that the financial crisis is not over yet. We also like to invest in things that are transparent. Most investment banks don't exactly fit into that category even though many of our nation's economic policies of the past decade have benefited those in the banking, mining/drilling, and defense professions almost exclusively. Enough with the politics of QE -- here are five names that can help protect you from losing your purchasing power under QE forever.
Newmont Mining (NEM) -- Newmont is interesting because the company's gold reserves in the ground look to be vastly undervalued when compared to sector peers and to the current market cap. Because the stock also trades for a reasonable valuation on current earnings and cash flows we think Newmont is a cut above the rest in the mining space. While the company did record a billion dollar loss in Q4 of 2011, we think this skews the valuation somewhat and could be more of a one time item given the fact that the company remained free cash flow positive over the trailing twelve months despite this accrual write down. Mining is a very capital intensive business, but overall, the higher the price of gold, the higher the price NEM shares should fetch on the stock market. It's not cheap to get gold out of the ground, but with $2,000 gold, it's well worth the trouble. In other words, gold mining is a good business to be in when the Fed is printing money.
Conoco (COP) -- Conoco looks like a solid long term investment trading at a cheap multiple to cash flow and earnings. COP's 4.6% dividend yield is attractive as is the 6.8X earnings multiple. With some of the largest reserves of crude oil in the world, we will have to wait and see on whether COP can weather the next financial crisis better than they handled 2008. Covered calls or put selling strategies also make sense here for investors looking to mitigate risk and gain income or for investors looking to buy Conoco at a lower price.
iShares Gold Trust (GLD) -- Nothing shines brighter than gold in an environment of global currency debasement and debt monetization. To be sure, the first fiat money issued by the Chinese to pay war debts became completely worthless, as did the Roman Empire's fiat currency. When governments print up paper to drop real bombs or arm real troops with guns and ammo, paper (or digitally created) money loses value. I think that gold will trade much higher over the coming years.
Sprott Physical Silver Fund (PSLV) -- Silver may be an even better investment than gold given the realities of QE forever. Silver is used in catalytic converters, microchips, surgical instruments, etc... and has historically been used along with gold as a form of coin-able money. Silver has never been worthless, and I think that because of the fact that a shortage of silver is a very real possibility, this largely scarce resource is likely the best investment around. PSLV is interesting in that investors can actually redeem silver bars from the fund if they so choose. Eric Sprott is also a legendary hard asset investor in his own right, and owning this fund can help investors stay focused on the long term thesis he endorses. We like PSLV better than the iShares Silver Trust (SLV) because of the fact that PSLV stores all of their silver in Canadian bank vaults.
Rogers Raw Materials Index (RJI) -- This is my favorite investment on a public exchange because it weights commodities based on global demand. The diversification offered at RJI is impressive, with everything from Cocoa to Azuki Beans rolled into one diversified raw materials fund. We think RJI is a good long term investment as long as governments are engaged in currency wars and money printing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.