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Bruce Vanderveen
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The Federal Reserve has pegged interest rates to all time lows. This leaves income investors in a quandary - not knowing where to invest. Bruce looks at the best income, growth, natural resource, and technology equities while taking a contrarian approach. ETFs can often be used to mitigate risk... More
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  • QE2 or the Titanic
    Bernanke on the TitanicSomeone has awaken the band, found the girls, and broken out the drinks!  Thanks to Ben Bernanke's Quantitive Easing 2 (QE2) November 3rd announcement the risk asset party is in full swing again.

    The Fed's planned purchase of $600 billion in Treasuries and QE1 rollovers over the next 8 months already has the money fleeing into equities, commodities, and emerging markets -- even before the QE starts!

    The elections put Congress out of the stimulus business.   Not to worry . . . .  The Fed's QE2 ship, captained by Mr. Bernanke, is launched and steaming off into dark, uncharted waters -- with or without congressional support.

    Since the U.S. dollar is the world's reserve currency, you might say Mr. Bernanke is Captain of the World.  Worldwide FOREX, bond, equity and commodity markets all soar or fall on the slightest nuances from him.  To argue if it right for one man to have so much power is, at this point, moot.  He simply has it.

    Who wins with QE?

    • Banks:  They get liquidity and more time to repair their balance sheets.  The interest free money is reinvested where it earns more (rate arbitration -- profits come from the spread).  Why risk loans to the private sector when you get a risk free return from Uncle Sam?  According to Shahien Nasirpour in the Huffington Post U.S. banks own $1.6 trillion in taxpayer-backed assets such as Treasuries and Fannie and Freddie debt.
    • Some of the public:  Rising markets benefit those who have the foresight be invested in them.  The hope, of course, is that inflating asset values will eventually spread to the increasingly desperate real estate sector.  No sign of that happening yet though.
    • Corporations:  They are floating bond issues while interest rates are low -- get while the getting is good.  The stock market recognizes this and is rising.  High unemployment allows corporations to keep wages low and employees working on over drive.

    Who loses with QE?

    • Savers and other frugal people:  Interest rates are at record lows.  I didn't even bother listing the $2 interest income I made last year from a savings account.  The Fed is forcing us into risk assets and anyone who holds cash in U.S. dollars or cash equivalents such as treasuries loses.  If bond markets crack and interest rates skyrocket (as they will if inflation picks up) anyone holding fixed income denominated in U.S. dollars takes big losses.
    • The U.S.:  Dollar devaluation sparks up commodity prices and exports inflation world-wide.  The recession stricken U.S., however, does not have the room to increase wages to compensate increasing fuel and food prices.  You already see the signs -- more people walking or bicycling (that may actually be good), more gardens, more roadside produce stands, empty malls, shuttered businesses, large numbers of homeless, etc.  The bottom line: One way or another, the U.S. standard of living is declining.

    Other QE risks.

    • Currency war:  QE in the U.S. raises all kinds of red flags abroad.  Both European and Japanese Central Banks may be forced to intervene (retaliate?), precipitating a "currency race to the bottom".  No wonder precious metals seem to be rising nonstop --  a certainty in a world of uncertainty.
    • Capital outflows from the U.S.:   It flees to friendlier shores.  Badly needed domestic investment shrivels and the U.S. economy languishes.
    • Never enough QE:  The $1.6 trillion QE1 did not revive the U.S. economy, so how will QE2's $600 billion?  Additional QEs will probably be implemented.  The Fed is independent and can buy whatever it wants, mortgage backed securities, bonds of all types, equities, you name it.  Eventually the U.S. will be forced to give up these futile attempts at stimulus; rates will go up and markets down as reality is faced.  The unfortunate fact is that QE has never worked in the long run.  Maybe this time will be different but don't bet on it.

    Investment ramifications.

    • Real assets:  Maybe stay with ETFs to avoid single issue risk. Precious metals (GLTR), agriculture (DBA), and energy companies (VDE) are but a few.  Click on the ETF tab on the Seeking Alpha website for additional ideas.
    • Minimize fixed income investments (bonds): Upside risk is limited while the downside risk is infinite.  If you have safe treasury bonds and the incomes covers a fixed rate mortgage . . . maybe keep those -- some hedging is always a good strategy in times of uncertainity.
    • Go with the trend:  Wisdom Tree Emerging Mkts SmallCap Div (DGS) is one of dozens or more Emerging Market investments to consider.  As long as the Fed keeps its Zero Interest Rate Policy -- ZIRP-- you might consider some high dividend REITS such as Annaly Capital Management (NLY) and Chimera Investment (CIM) which benefit from ZIRP.  This is a risky area though as things can change quickly.
    • Protection: You can protect yourself from rising interest rates with TBF and TBT but be aware of daily rebalancing erosion .

    As always, do your own due diligence in picking investments.  Everyone's investment strategy and needs are different.  Only you can decide what is best for you.  This article only presents my thoughts on macro trends and is not a recomendation to buy or sell.   But, whatever you do, watch the bond market and Mr. Bernanke closely in the coming months and year.



    Disclosure: Small positions in CIM and TBT. DGS in Roth IRA
    Nov 06 9:21 PM | Link | Comment!
  • Hot Summer, Hotter Bond Markets
    Unrelenting summer heat has broiled most of the U.S. into a stupor.  Russia had extremes of heat and drought not seen in hundreds of years.  Global warming theories are again on the front burner.

    The SP500 has wandered aimlessly all summer and now is about where it was in early June.  The U.S. dollar has mostly fallen, though firming recently.  Commodities, as show by the CRB Spot All Commodities Index, are strong and rising.  Equity volume is light, cash positions high.

    Many "went away in May" and are sitting out this hot summer in cash or treasuries.  Is this a smart thing to do?  Well, the stash under your mattress may be safe as long as ex-spouses, burglars, mice and the federal government stay away.  I would be most worried about that last one.

    But, wow!  Look at the bond markets!  In case you haven't noticed, everything is on a tear.  Treasury, corporate, sovereign, and municipal bonds, all are trending (in some cases rocketing) up.  U.S. 10 year treasuries as shown by IEF recently topped 98 with the yield dipping below 2.6%.

     
    Even traditionally risky bonds are in a strong upswing.  Consider junk (aka hi-yield) issues.  JNK has risen signifigantly over the last 3 months -- no recession predicted here.

     
    Emerging market bonds also continue to out-perform.

    As an (perhaps unrelated) aside note: Obama's economic advisers are jumping ship.   Peter Orszag, director of the Office and Management and Budget resigned in late June while the ebullient Christina Romer, chair of the White House Council of Economic Advisers, plans on stepping down in September.  Both Orszag and Romer say they are leaving for personal reasons, not job frustrations.  Well . . . draw your own conclusions.

    So what to make of it all?  Do record low 10-yr yield indicate a flight to safety ahead of a coming crash?  Or, do steadily rising hi-yield (junk) bonds, strong commodities and emerging market indexes indicate a recovering world economy and strengthening inflationary trends? 

    It may be a mistake to fight the upward trending 10 year treasury but I would watch this very carefully.  U.S. treasury upside potential is limited while downside risk is very high --  if bonds crash.  It may not be too early to take a position in TBF or TBT (short and ultra-short 20+ year U.S. treasuries ETFs). At the very least, keep a close eye on this market.   Also, you may wish to consider ENY, the Canadian Energy Income Index, which has both yield (3.6%) and real assets of  Canadian oil and gas.  Gold (GLD) will be strong with disruptions in currency markets.

    With the U.S. government facing northward of $100 trillion dollar in debt obligations eventual massive money printing seems inevitable.  It just isn't here yet.  Things could end badly with high inflation or possible currency (U.S. dollar) devaluation.

    The hot summer of 2010 will soon be a memory.  If bonds go south, however, a lot of other unpleasant things will heat up fast, making us long for the days when just the weather was hot.



    Disclosure: Long IEF, TBT
    Tags: IEF, JNK, TBF, TBT, ENY, GLD, EMB, Bond Markets
    Aug 17 5:01 PM | Link | Comment!
  • A Lot to Lose
    The immensity of the unfolding disaster from the out of control oil well in the Gulf of Mexico is only now beginning to sink in. Estimates, which vary wildly, show as much as 200,000 barrels of crude a day spewing into the ocean. We are in an early stage of an unprecedented environmental disaster.

    Last Sunday's St. Petersburg Times Headline "A Lot to Lose"  says it all. And once the oil reaches the Gulf Stream it will be dispersed from off the Louisiana, Mississippi, and Alabama coastlines to around Florida, up the U.S. east coast, then across the Atlantic toward Great Britain and Europe. One can only speculate on the detrimental effects on fish, shrimp, birds, sea turtles and other wildlife. We can only cross our fingers hope for the best.

    Don't own BP stock? Think this doesn't affect you? Think again! Florida's pristine sand beaches, the price of seafood, the birds, the sea turtles, all will suffer. You better believe that everyone who drives will be paying more for gas because of this catastrophe. Sarah Palin's "drill baby drill" image and Rush Limbaugh's "Eco-Nazi" rants are about to get a long over due dose of reality.

    Gulf of Mexico oil production, one of the two bright spots (the other is North Dakota) in U.S, has dimmed. Oil production has been increasing in the Gult in the last few years. Now, with new drilling temporarily halted, that trend may reverse.

    Since the U.S. absolutely needs oil, economic considerations will prevail driving even more drilling. We will pay for it not only at the pump but in diminished quality of fisheries and beaches.

    Who is to blame? BP, who operated the now sunken rig? Transocean (RIG), who owns the rig? Cameron (CAM), who made the apparently malfunctioning blow out protectors? Alan Von Altendorf, who is well versed in the field, forecasts BP costs at $10 billion and Transocean $1 billion, STO, and HAL are also impacted. You can read his article here. Legions of attorneys will be arguing this one for a long time. They are all already leaving off ambulance chasing and flocking to the Gulf coast.  Billions of dollars beckon.

    And this is how it always seems to play out. The road to peak oil is not a smooth slow rise. Rather it goes forward and backward in jolts. This disaster is one of the jolts up. It is never a simple smooth trend. A full blown global crisis (markets are wildly down as I write this) may yet again drive oil prices dramatically lower. In the long run. however, supply/demand issues worldwide, and global fiat money printing will propel oil pricets much higher.

    Back in the 1960's we lived with the environmental illusions that as long as we picked up our litter, didn't carve initials in trees, followed Smokey the Bear's admonishments, and ate the government recommended three square meals a day, all would be well forever.

    Now we have thick oil on our beaches and in our oceans, crashing fisheries, hardwood trees dying by the thousands across the eastern U.S. from man dispersed exotic insects and fungi, and 62% of Americans overweight or obese with gas guzzling SUVs.  Where did it all go wrong?

    Disclosure: No Positions
    Tags: BP, RIG, CAM, HAL, STO, Oil Spill
    May 05 7:16 AM | Link | Comment!
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