Trends I'm Watching

Eight ETFs to Preserve Your Wealth

Trend: ETFs that help investors cope with falling stock market will be in demand until the recession is over.

Simit Patel at Seeking Alpha describes eight ETFs to consider for an inflationary depression.

Link: Eight ETFs to Preserve Your Wealth - Seeking Alpha.

1. Foreign Bond ETFs. There are a number of foreign bond ETFs -- FAX, FAM, EDF, among others -- are also appealing to many seeking to diversify outside the US. In addition to providing stable income returns that bonds offer, they also allow for protection against dollar devaluation.
2. VEU. This fund seeks to replicate an index of 2,200 stocks in 47 countries outside the US. Because of its diversity, it is viewed as a great way to hedge against systemic risk in the United States. It is, however, down 10.08% this year.
3. FXE. The FXE ETF tracks the Euro. As regional currencies tend to proliferate, the Euro may be a particularly effective hedge against the US dollar. It is up 9.68% thus far this year.
4. GLD. This fund seeks to reflect the performance of gold bullion, less the Trust's expenses. At the time of this writing, GLD is up 10.98% this year, and 28.12% over the past three years. Given gold's status as a safe haven that preserves value, this ETF can help hedge against dollar devaluation.
5. GDX. This ETF invests in publicly traded companies involved primarily in mining for gold and silver. Currency devaluation increases demand for precious metals, which in turn increases demand for mining businesses.
6. SLV. While gold tends to be the primary precious metal of choice to hedge against currency devaluation, silver is often viewed as a backup store of wealth as well. The greater the US dollar devaluation, the more likely demand for silver will rise. Thus far, silver is up 19.28% this year.
7. USO. In recent history, oil and the US dollar have been inversely correlated; as such, dollar devaluation is widely regarded as the primary cause of higher oil prices. This presents an opportunity to invest in oil to hedge against dollar devaluation. The USO ETF seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. USO is up 49.47% thus far this year.
8. DBC. A depression tends to result in a flight from financial assets to commodities. We've seen early signs of this in the United States, with food and gas prices rising. The DBC ETF invests in a portfolio of exchange-traded futures on the commodities comprising the index, or the index commodities. The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat. Thus far, the DBC ETF is up 42.84% this year.

The Road Ahead

Trend: The next few months will stress financial institutions and investments regardless of the fate of the Paulson Plan.

Michael Lewitt of Hegemony Capital Management sees a deep recession in the future. The excerpts below tell why.

Link: Haste Makes Waste - John Mauldin's Outside the Box - InvestorsInsight Publishing.

HCM has been warning for years that all of the king's horses and all of the king's men wouldn't be able to put this mess back together again. It is now time for America to take the pain and figure out how to move forward. Any plan that is adopted must include a sufficient dose of strong medicine to prevent the culture of self-delusion and moral hazard that created the current crisis from further perpetuating itself. The purpose of the Paulson Plan has to be to rebuild confidence in the financial system. The manner in which the plan was presented and debated rendered that more difficult but hopefully not impossible. For any plan that fails to bring confidence back to the market will not work.

What Henry Paulson and Ben Bernanke are desperately trying to explain to Congress is that America's leadership must immediately restore the world's confidence in American economic and political leadership. But the Paulson Plan was generated under impossible conditions. Were it to succeed, the best that could be expected at this point is a slow revival of the credit system. To hope for more is sheer folly. It is a certainty that America, and then the rest of the world behind it, is going to experience a severe recession the likes of which it hasn't seen for decades. Frankly, HCM can't see any way that such a slowdown can be avoided, although HCM has some ideas on how to begin to work out of it. Moreover, if by some miracle it were to be avoided, it would merely delay the inevitable purging of the psychological and financial excesses that have been piling up in our economic system over the past thirty years. One of the problems plaguing America is that we have become so frightened of short-term pain that we are willing to risk incalculable long-term suffering. Any plan that treats the symptom (the loss of confidence) and not the disease (the underlying problems that caused the loss of confidence) will not solve the real problem.

At one point during the bailout negotiations, Henry Paulson was seen genuflecting at the feet of House Speaker Nancy Pelosi, a fitting emblem of just how far the credibility of the Bush Administration has fallen. Earlier policy blunders are now haunting a lame-duck Administration. The Paulson Plan is being pushed with the same kind of urgency that pushed the U.S. to invade Iraq, and the President has no more weapons of mass destruction to sell. There are legitimate fears that anything approaching the Paulson Plan, like the Iraq War, will get quickly bogged down in the complexities and contingencies that will be encountered on the battlefield. Despite the cries of pain from the credit markets, HCM has never believed that the world would spin off its axis if a deal is not rushed to completion in the next few days. A bad deal would be worse than no deal at all.

There is one practical problem that will plague the Paulson Plan and any plan that involves the government purchasing distressed assets from financial institutions. These assets are NOT(!!!) accurately valued on the books of financial institutions. Accordingly, these institutions are not in a position to sell them to the government at current fair market value. Any sales at current market value would inflict huge losses on these institutions. The alternative is for the government to grossly overpay for these assets, which would constitute a disguised capital infusion into these firms that would short-change the American taxpayer. This flaw in the plan is why members of Congress from both sides of the aisle insisted on some kind of profit-sharing structure that would compensate taxpayers in the event the government pays above-market prices for assets. HCM fears that very little of the $700 billion is going to be spent in the near future because of the reluctance of banks to part with assets at anywhere near their current value, and the government's reluctance to overpay for these assets.

HCM views the Paulson Plan as a matter of form over substance. The details of how the plan will work are ultimately less important than whether the plan succeeds in rebuilding market confidence. In order to be successful, the Paulson Plan needs to be followed up by comprehensive regulatory reform that accomplishes the goals of convincing the public that the financial system will be fairer in the future than it has been in the past (i.e. that the gains will be spread more equitably and that failure will not be rewarded) and that strong steps will be taken to prevent the oversights that led to the current instability from being repeated.

Time to invest in Gold?

Trend: Gold and precious metals are gaining favor as the financial uncertainty increases and the dollar loses steam.

Jim Jubak at MSN Money (he's no goldbug) sees gold prices rising in the next few months. Excerpts below.

Link: Are we buying a $700 billion 'maybe'? - MSN Money.

Jubak writes:

Shares of gold mining companies took a beating this summer as the dollar unexpectedly rallied. Gold shares took a beating, and Kinross Gold (KGC) was no exception. Its shares fell 51% from July 14 through Sept. 9. The reversal in the past two weeks has been stunning. The shares climbed 46% from Sept. 9 through Sept. 24.

I think gold is likely to take a bit of time to consolidate its gains near the $900-an-ounce level, but continued global turmoil and the prospect that the U.S. Treasury will actually have to sell $700 billion in bonds are likely to keep gold and gold shares moving up over the next six months.

Wall Street analysts are busy raising their estimates for gold prices. On Sept. 23, for example, UBS (UBS) raised its November target for gold to $925 an ounce from $850 and its three-month target to $975 from $900. Gold closed at $888.50 an ounce on Sept. 23.

Kinross projects production will climb to 2.5 million ounces in 2009 from 2 million this year. That, plus an increase in the price of gold, should make the next year better than the last for Kinross shares. As of Sept. 23, I'm raising my target price slightly to $26 a share by July 2009 from the prior $25 a share by September 2008. (Full disclosure: I own shares of Kinross Gold in my personal portfolio.)

U.S. Oil Supplies Depend on Middle East

Trend: The U.S. grows more dependent on Middle East oil as Venezuela commits oil to China.

Jim Kingsdale's Energy Investment Strategies describes a Venezuela - China energy alliance that will reduce the amount of oil available to the U.S. Excerpts below.

Link: More Chavez Oil Mischief | Jim Kingsdale's Energy Investment Strategies.

Kingsdale writes:

Hugo Chavez would like nothing more than to sell all his oil to some customer other than the U.S.  That way he both gets his revenue and hurts his enemy.  He seems to have found his customer - China.  As the report below describes, Venezuela, which has ramped up its China oil sales.... Since the Venezuela currently is the fourth largest supplier to the U.S. at 1.1 mb/d and since exports from Mexico, our third largest supplier, are declining rapidly the U.S. will be increasingly dependent, it seems, on Middle East  and African oil.  But mostly the Middle East. 

It may be that global oil supplies are fungible, but as supplies peak and demand from China and other growing economies increases, one-to-one deals between a major supplier and a major exporter result in more oil being taken off the free market, which will put increasing pressure on the free market price of oil. 

I imagine that the U.S. civilian and military planners, who are both already concerned about the increasing cost of fuel, are now starting to become even more concerned about the increasing vulnerability of U.S. oil supplies to the vagaries of very long distance transportation.  Again, oil becomes more and more of a national security risk as time goes on.

Chavez sees 1 million-barrel oil exports to China

By CHRISTOPHER BODEEN, Associated Press Writer Wed Sep 24, 6:35 AM ET

BEIJING - Venezuelan President Hugo Chavez says his country’s oil exports to China could soar to 1 million barrels a day by 2012.

Chavez’s visit this week to Beijing has focused on trade and business ties, including refinery construction deals and China’s launch of a Venezuelan communications satellite.

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Bear Market Investing

Trend: Enbridge has returned 8% in price gains and dividends to investers in 2008.

Jim Jubak at MSN Money recommends a stock weathering the financial storm well with pipeline and windpower projects. Excerpts below.

Link: Another devil in the financial crisis - MSN Money.

Jubak writes:

Enbridge (ENB) has held up well during the bear market. The total return -- price gains of 4.56% and dividend payments of $1.32 a share since my December 2007 buy -- comes to 8.4%. Some of that is the result of the stock's dividend, about 3.1% as of Sept. 22.

But more, I think, is related to on-track progress in the company's new pipeline and wind-power projects. As these projects go into service, they go from being a drain to being a contributor to Enbridge's bottom line. For example, the Waupisoo Pipeline, to bring oil from the Alberta oil sands to Edmonton, went into service in the second quarter, a month ahead of schedule. The company's Ontario Wind Project is on track for completion later this year. The Alberta Clipper project remains on schedule for 2010.

It has also helped the stock that the company has been able to raise $1.4 billion from its sale of a 25% interest in Spanish pipeline company Compania Logistica de Hidrocarburos. That's capital that Enbridge doesn't have to raise in today's volatile financial markets.

As of Sept. 23, I'm increasing my target price for shares of Enbridge to $48 a share by February 2009 from my prior target of $46 by December 2008. (Full disclosure: I own shares of Enbridge in my personal portfolio.)

View the full ENB chart at Wikinvest

Creating Money to Pay the Bills

Trend: Money creation by the Fed will devalue the dollar.

Bill Fleckenstein at MSN Money warns about the Feds plan to increase the money supply. Excerpts below.

Link: Whatever we do, it will be wrong - MSN Money.

Last Wednesday, it was announced that the Treasury plans a special series of bill auctions to help the Fed expand its balance sheet. Read: The Fed is going to print money to buy Treasurys so that the Treasury Department can lend money to all these institutions. In other words, the printing presses are setting about monetizing all of our problems.

Of course, this will lead to other problems, and it's why gold exploded by $80 an ounce last Wednesday. 

(The chart below shows the price of the ETF GLD, which tracks the price of gold.)

View the full GLD chart at Wikinvest

Foreigners are finally watching. Last Tuesday, China's People's Daily said that the world is "threatened by a financial tsunami." In essence, the paper said, countries need to consider building a new financial and currency order that is not dependent on the United States and the dollar. After all, who wants to lend money to somebody who uses a printing press to pay you back? Obviously, the script you get paid in can easily become worthless.

Events continue to move at a fast and furious pace. I don't think we've seen the last of startling actions. As for the investment ramifications of all of this action and potential future action, I think folks need to understand that amid the crosscurrents and head fakes, the potential to make mistakes is going to be extremely high. Probably the fewer decisions made right now, the better.

Relationships Between Financial Markets and Energy

Trend: Energy prices are playing a significant role in the turmoil in the financial markets.

Gail the Actuary at The Oil Drum describes how energy markets affect financial markets. Excerpts below.

Link: The Oil Drum | The Connection Between Financial Markets and Energy - Open Thread.

(1) Some of the organizations with problems were no doubt speculating in oil futures. Once the prices started to drop, the balance sheets of the organizations were affected, and they suddenly needed more capital.

(2) As the companies who speculated in the oil market (all of them, not just the particular ones having problems today) try to unwind their positions because of margin calls, they drive down the price of oil in the futures market. That is likely why we are seeing declining oil prices, at a time when fundamentals would say they should be rising.

(3) As the price of oil and food rises, people have less money to pay debt of all kinds. This has contributed to the rising mortgages defaults, and is helping to drive down home prices. This is very closely tied to problems of banks and other financial institutions.

(4) Structured securities based on sliced and diced mortgages and other debt depend on assumptions regarding "independence of defaults". Once a shortage of oil and higher food and energy prices start causing mortgage defaults, the defaults are no longer independent (as they would be if they were caused by an illness of a particular homeowner, for example). Instead, there is a systematic bias in the pricing the risk, and the structuring doesn't work as planned.

(5) Energy companies need well-functioning credit markets to expand their exploration and production, and to pursue alternative energy approaches. For example, expanding the use of wind energy, or electric-powered vehicles, is likely to need a huge amount of debt financing.

Best Performing ETFs for the Past Week (2008-09-12)

Trend: PowerShares DB Crude Oil Dble Short ETN (DTO) led the one week performance (+9%, +22% for 4 weeks, n/a for 13 weeks). iShares Dow Jones US Home Construction (ITB) and PowerShares DB Gold Double Short ETN (DZZ) were the second and third best performers, respectively.

The 20 ETFs with the best 1 week performance through 9/12/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
PowerShares DB Crude Oil Dble Short ETN	DTO	Specialty - Natural Resources			$41.37	8.95	22.18	N/A	N/A	N/A	N/A	N/A
iShares Dow Jones US Home Construction	ITB	Specialty - Real Estate	holdings		$18.06	8.74	16.01	18.42	3.37	-14.00	N/A	N/A
PowerShares DB Gold Double Short ETN	DZZ	Specialty - Precious Metals			$37.99	7.86	13.33	24.68	N/A	N/A	N/A	N/A
FocusShares ISE Homebuilders Index	SAW	Specialty - Real Estate	holdings		$51.00	7.71	12.09	17.51	1.96	N/A	N/A	N/A
iShares MSCI South Korea Index	EWY	Pacific Stock	holdings		$43.54	7.61	-11.14	-19.73	-31.90	-29.51	5.76	14.58
KBW Regional Banking ETF	KRE	Specialty - Financial	holdings		$36.40	7.53	8.33	23.57	-1.23	-12.83	N/A	N/A
UltraShort FTSE/Xinhua China 25 Proshare	FXP	Income	holdings		$103.10	7.40	16.97	30.02	34.74	N/A	N/A	N/A
SPDR S&P Homebuilders	XHB	Specialty - Unaligned	holdings		$21.26	6.89	13.57	19.86	10.96	-4.75	N/A	N/A
UltraShort Semiconductor ProShares	SSG	Specialty - Technology	holdings		$84.54	6.74	38.57	34.06	50.98	60.97	N/A	N/A
NETS ISEQ 20 Index	IQE	Europe Stock	holdings		$18.96	6.10	-4.63	N/A	N/A	N/A	N/A	N/A
E-TRACS UBS Short Platinum ETN	PTD	Specialty - Precious Metals			$35.25	6.08	10.92	40.83	N/A	N/A	N/A	N/A
Ultra Consumer Goods ProShares	UGE	Specialty - Unaligned	holdings		$65.71	6.00	1.14	6.29	-11.12	-4.02	N/A	N/A
iPath DJ AIG Lead TR Sub-Idx ETN	LD	Specialty - Natural Resources			$53.40	5.18	10.38	N/A	N/A	N/A	N/A	N/A
PowerShares FTSE RAFI Consumer Goods	PRFG	Specialty - Unaligned	holdings		$44.43	5.04	4.17	1.64	-8.60	-10.45	N/A	N/A
Ultra Real Estate ProShares	URE	Specialty - Real Estate	holdings		$30.36	4.98	0.50	-5.41	-10.52	-26.13	N/A	N/A
iShares FTSE EPRA/NAREIT Global RE ex-US	IFGL	Balanced	holdings		$34.56	4.85	-4.92	-11.80	-25.69	N/A	N/A	N/A
PowerShares HighYield Dividend Achievers	PEY	Growth and Income	holdings		$10.83	4.74	6.45	12.49	-15.74	-21.95	-7.31	N/A
iShares FTSE EPRA/NAREIT North America	IFNA	Specialty - Real Estate	holdings		$48.00	4.56	1.84	3.51	4.33	N/A	N/A	N/A
First Trust FTSE EPRA/NAREIT Glb Real Es	FFR	Specialty - Real Estate	holdings		$39.50	4.50	-2.11	-6.58	-15.01	N/A	N/A	N/A
PowerShares DB Commodity Dble Short ETN	DEE	Specialty - Natural Resources			$30.84	4.44	13.38	57.16	N/A	N/A	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

Is the Financial Crisis Over?

Trend: The current financial crisis will end when flawed financial and political policies are fixed.

Michael Lewitt of Hegemony Capital Management describes why the Freddie and Fannie nationalization is a wake-up call. Excerpts below.

Link: This Crisis Is Not Over - John Mauldin's Outside the Box - InvestorsInsight Publishing.

The credit collapse can be laid directly at Wall Street's door. We do not say this because we like sounding churlish, but because what has occurred has real, negative long-term economic and political consequences.

The cost of our unwise and corrupt policies has already been very high and it will continue to rise unless we act now to do better. Confidence in the American model of capitalism has been shaken with good reason. Despite the rally of the dollar (mostly against the Euro, another compromised currency), the U.S. currency has been battered largely due to a loss of confidence in American economic policies and leadership.

We continue to shift hundreds of billions of dollars out of our own coffers into those of countries that do not share our beliefs because we have moved too slowly to develop sound energy policies. In large part this is because our politicians remain indebted to an automobile industry that is on the verge of insolvency and to an energy industry that places its own interests ahead of the country's and the world's.

We have allowed our derivative markets - specifically those related to credit (i.e. credit default swaps) - to grow in a completely unregulated manner to the point where everybody is basically holding their breath and praying that a financial accident won't occur. This has occurred largely because it has been in Wall Street's interest to limit regulation of derivatives.

But the time has come to stop allowing the fox to patrol the chicken coop. Just as it was completely foreseeable that Freddie and Fannie would fail, it is a certainty that we will face future crises if we continue to avoid difficult and unpopular choices or refuse to speak truth to power. How many wake-up calls do we need?

Countries Are Guarding Their Oil Wealth

Trend: Countries with oil reserves are moving towards hoarding the oil, reducing the power and profitability of international oil companies.

Keith Kohl at Energy & Capital describes why the price of oil for countries without abundant reserves will increase in the long run. Excerpts below.

Link: Oil Wealth

Within the last few years, countries have been taking control of their oil reserves. And in order to secure a larger amount of their oil revenues, time and again countries have gone to great extent to tighten that grip.

I'm certain most of you remember when Russia pushed Shell out of their controlling stake in the Sakhalin Island. Of course, we can't forget when Chavez wrested control of Venezuela's oil projects back in 2007.

After the recent discovery of the Tupi field off the coast of Brazil, the government appears to be looking forward to those revenues. In order to get a larger piece of the revenue pie, Brazil's government will obviously make a move and grab more shares in the state-controlled company.

If you really want an idea of how serious these countries are to protect their oil wealth just look at the latest deal inked between Iraq and China.

Last week, the Iraqi government approved a contract between Iraq's state-owned oil company and the Chinese National Petroleum Company (CNPC). The deal was to let the Chinese develop the Ahdab oil field. The deal was originally signed back in 1997.

The real blow came when Iraq renegotiated the terms from a production sharing agreement to a set-fee service deal. Now, the CNPC will only get approximately $6 per barrel produced. The fee is cut in half once production hits its target of 115,000 barrels per day. No matter how high oil prices move in the future, the CNPC's profits are set in stone.

The reason is simple enough. Over the next few years, oil markets will continue to tighten, and you can bet these countries will protect their oil wealth at all costs, right down to the last drop.