Bruce Vanderveen's  Instablog

The dollar keeps falling while "real" assets such as gold, oil, and equities continue to march ever upward.  Its great to go along for the ride but keep in mind that "all good things must come to an end someday".  Sometimes a violent end! When the tide turns ... and you know it will ... how can you position yourself?

Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time.  However, investments that do well when things go the other way are much harder to find.  Here are some ideas on how to hold your own, if not profit.

First, get into a healthy cash position, then consider these ETFs.  Most did well or at least held their own in the 2008 bear market.  Two are currency ETFs.  Currency markets are much larger and independent of equity markets.

1. UUP  Yes, the much maligned US dollar.  Just how low can it go?  Well, don't answer that question, but do consider that UUP was probably the best performing ETF in the second half of 2008.
2. CYB  The Chinese yuan.  This is an interesting play.  Currently the yuan is pegged to the US dollar but any change will most likely have the yuan appreciating versus the dollar.  Note that the yuan mostly held its own during the second half of 2008.  China is also printing money but doesn't have the deficit problems the US does.
3. TIP and BND  TIP invests in inflation protected US bonds and did not do well the second half of 2008.   However, if you see a stagflation scenario ahead TIP may be a good place to be. BND tracks a "broad, market weighed index" of bonds and except for a violent but brief spike down in September, when everyone was panicking, held its own throughout 2008.
4. DOG, SH, PSQ and RWM.  These inverse ETFs are a convenient way for investors to "short" the market and a great place to be in falling markets.  But, remember these ETFs are subject to tracking error and values decay over periods of time.  Also, see the comment about "bear" ETFs below.
5. GLD  Gold is commonly thought of as an inflation hedge.  Yet, more than anything, it is a store of value in uncertain times.  If you see greater than normal financial and social unrest ahead -- and most of us do -- you may want some gold investments.

If you are a day trader you can see a list of Yahoo Finance's "bear" ETFs here. Remember, most if not all, of these are for day traders only because of daily rebalancing.  Held long term, they not only can, but will, destroy your portfolio.  Click the "Return (Mkt)" tab on the Yahoo site to view the "Red Sea" of three year returns, losses run up to 70, 80, even 90 percent.  Only one, UDN, shows a positive three year return -- wonder why?

So, when will the equity-commodity-bond market run end?  Consider these potential early warning signs:  long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which
may cause the US Federal Reserve to raise rates.  For now the "herd" is jumping on the band wagon -- and more are boarding every day --  so enjoy the party.  But, be ready to jump when the music gets out of tune and the wagon starts swaying.

Disclosure:  I have a small "precautionary" position in SH

The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave.  A dome of sauna-like high pressure blanketed the state.

The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.

First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers.  More signs than customers, all touting SunTrust's "SOLID" message.  I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest.  You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's  web site here.

More »

Up until recently oil prices and market indices have risen and fallen together.  This may be coming to an end.

Sooner or later investors will realize that higher oil prices are bad not good for the economy.  Up until recently the thinking was that oil price increases were based on increasing demand, indicative of economic revival.  Dollar weakness however, not fundamentals, is driving oil prices (and other commodities) higher.

One could argue that all the 0% money available from the Fed is finding its way into speculative investments looking for a fast buck.  Where would you rather be, earning a quarter of 1% a year in safe treasury bills or hitching a ride on commodities which sometimes seem to go up 2% or more a day?

The bubble is busy expanding right now and can only end in disaster, another crash, rampant inflation or both.  Such is the consequence of 0% interest rates, debt creation and money printing.

Since the March lows stocks have rocketed up 50% or more and the trend shows no sign of abating.  Back in March there was almost universal pessimism.  So what has changed?

Have fundamentals really improved?  Unemployment is still going up.  Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money".  I guess California at least gave it a try with those infamous "IOU"s.  How green will the shoots stay if government money slows or stops?

In my opinion this is a tax payer fueled rally.  A massive infusion of newly printed money (backed by US taxpayers) is flooding the system.  The major recipients of this largess, the banks, get this money loaned to them at 0%.   They then do what all good bankers do,  reinvest the money at higher interest rates and profit from the spread.  With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.

The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value.  Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved.  Question is:  Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans?  If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade.  Let's hope they don't start leveraging.

Unfortunately, US taxpayers will pay a terrible price.  Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?).  The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do.  He doesn't dare raise rates, he may have no choice about leaving short term rates low.  I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued.  You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe.  Maybe policitcally they had no choice.

Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward.  Even real estate is showing signs of bottoming.

Devaluing the dollar will cost all Americans dearly.   It will increases the price of just about everything and sets the stage for hyperinflation.  Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40.  Health care?  Well, we don't even want to go there.  Savings and fixed income instruments would be devastated.

We have always had to deal with inflation to some extent.  The problem now is it threatens to spin out of control.  Hitting that magic window of 1-3% inflation may no longer be possible.  People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.

Disclosure: No positions in UUP, GLD or UCO

Up until 100 years ago our ancestors needed timber almost as much as water to survive.  Keeping warm, building shelter, constructing tools, all called for timber.  It was necessary for survival and life itself.  Indeed, plant material was (and still is) the basis of all life.

You can invest in timber by buying wooded acreage.  Periodically (like every 10-15 years) a timber company will pay to harvest your trees.  A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF  According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).

CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies.  As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified.  Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY).  A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.

In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and on the cut over lands.  You can still see the effects of the fires in Northern Michigan.

Today, timber is harvested for packaging, paper, building materials, heating and furniture construction.  Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy.  Many of CUT's holdings are packaging companies.

Is CUT a good investment?  You can make an argument either way.  On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand.  If nothing else you can always burn it for heat.  Wood heat is becoming preferred in rural areas as a replacement for expensive propane.

On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump.  Since CUT has more than doubled off its 52 week lows one must question the near term prospects, especially in a deflationary environment.  CUT, going forward, will undoubtedly mirror the health of the worldwide economy.

You can find more about CUT at this page on Claymore's website.

Disclosure: No Positions

It has been a cool summer in west central Michigan.   I can count on one hand the number of days this fast departing summer had temperatures reaching the low 80's.  Now, in the last days of August, temperatures drop into the 30s overnight.  Cold fall winds are blowing in early off Lake Michigan and the long gray winter suddenly seems closer.

More »