Trends I'm Watching

A New ETF for the Smart Grid -- Ticker GRID

Trend: New ETFs are being launched to capitalize on hot sectors; a new ETF (ticker GRID) is focused on the smart grid, which will receive significant funding from the stimulus.

Investing in companies that are building the smart grid is not easy -- the sector has many companies, large and small. The GRID ETF makes investing in smart grid companies much easier for the small investor.

Link: First Trust - www.FTPortfolios.com.

On November 16, 2009, First Trust Advisors L.P. launched the First Trust NASDAQ® Clean Edge ® Smart Grid Infrastructure Index Fund. This exchange-traded fund (ETF) trades on The NASDAQ® Stock Market under the ticker symbol (GRID). This ETF seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of an equity index called the NASDAQ OMX® Clean Edge® Smart Grid Infrastructure Index SM. The Index is designed to act as a transparent and liquid benchmark for the grid and energy infrastructure sector.

Peak Gold May Boost Gold Prices as Mainstream Media Creates Awareness of Inflation

Trend: Gold prices may be moving towards a bubble as the mainstream media writes about gold, the average Joe considers buying some gold, and gold miners see a decline in production.

Barrick Gold, a major miner of gold, says that global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots.

George Will at The Washington Post writes that interest in gold rises as worry about the growing debt in the US and subsequent inflation increases.

Jim Willie describes why holding gold and silver is so compelling to many people in the US.

Note: While many observers say that the price of gold has reached an all-time high, the inflation adjusted price of the recent "high" is less than half of the 1981 high.

The Federal Reserve Buying U.S. Debt: How Long Can It Continue?

Trend: The Federal Reserve has been buying U.S. long-term U.S. debt to support lower interest rates and the economic recovery.

The authors of this commentary suggest that Fed's debt buying actions appear to be unsustainable. Excerpts below.

Link: Who is really lending the US all this money? |AR Absolute Return - Alpha

...foreigners are selling longer dated US Agency/MBS debt and moving the money they raise into shorter term US Treasury debt. And who is buying this debt? The Federal Reserve.

Out of nearly $2.1 Trillion of net issuance across the Treasury, Agencies and MBS markets from June 2008-9, the Federal Reserve has accounted for nearly 40% of the total demand, buying more than every foreign government combined. It is also not a stretch to say the Fed has become the entire mortgage market; it has purchased nearly $500B of MBS securities during a period where there was only $350B issued. Looking at the first seven calendar months of 2009 yields similarly startling results: of the total $1.1 Trillion of net issuance across these markets, the Fed has purchased $861B or almost 80%.

The question we must all grapple with is what will happen when the Fed has completed its purchases. According to the US Treasury’s Department of Debt Management, the US is expected to issue $1-1.6 T of Treasury debt in the 2010 fiscal year. This implies that total US government market issuance next year could once again run in the $2T range. To make up for the Fed’s nearly $900B worth of purchasing would require the recently elevated household savings rate to double from 6% to 12%. Commercial banks, which have purchased nearly $200B of US debt in the same time period, would also need to double that amount again from this past year.

If the Fed simply walks away or even gradually moves away from the market, we will see bond market prices drop and mortgage and all other rates go higher, potentially crushing the nascent recovery. The CEO of Wells Fargo recently told a group of investors that if the Fed stopped buying MBS, mortgage rates could spike 100-150 basis points in a week.

If the economy turns down, sparking a flight to safety in Treasuries, the Fed will once again have to worry about deflationary expectations and respond by printing money.

Unfortunately, printing more money, expanding its balance sheet further, and hoping to “kick the can down the road” may not be a viable strategy for the Fed much longer either as nearly two-thirds of the US government debt comes due in the next 36 months.

The Federal Reserve, through a confluence of past mistakes, effective crisis response, and circumstance has found itself trapped with only painful options from which to choose.

India Central Bank Buys 200 tons of Gold for $6.7 Billion

Trend: Central banks with massive foreign reserves are spending dollars on gold, creating more demand for the precious metal.

David Parkinson at Seeking Alpha describes the reason that the price of gold spiked up on November 3, 2009. Excerpts below.

Link: Why the IMF's Indian Gold Sale Matters -- Seeking Alpha.

Bullion surged more than $30 (U.S.) to $1,085 an ounce in New York Tuesday, trouncing is record high set just three weeks ago, after the IMF disclosed that it had sold 200 tons of gold to the Reserve Bank of India - for the low, low price of just $6.7 billion. The sales took place over the past two weeks, and represent almost half of the IMF's previously announced 403.3-ton gold sales program.

The prospect of the IMF and other gold-rich central banks selling off gold reserves to the open market was one of the few factors out there weighing gold prices down. Ever since the IMF decided to start selling gold, market watchers had been bracing for a possible flood of gold supply that would take the wind out of gold's sails.

The fact that the IMF sold fully half of its gold program to a single buyer, off-market, in one fell swoop just six weeks after approving the sales program, caught the gold market by surprise.

Dept of Energy Grants $3.4 Billion to the Smart Grid Development

Trend: Smart grid technology, designed to increase energy efficiency, received a boost from $3.4 billion in grants from the Obama administration.

The focus is on smart meter installations, including advanced metering infrastructure, customer systems, electric distribution systems, electric transmission systems, equipment manufacturing, and integrated and/or crosscutting systems. Excerpts below.

Link: DOE Grants Jump-Start the Smart Grid Toward a Still Undefined Future - NYTimes.com.

President Obama traveled to Florida to highlight DOE awards to 100 utilities, equipment manufacturers, cities, systems developers and other recipients. The winners have committed $4.7 billion of their own resources to match the smart grid grants.

The president sketched his vision of a clean-energy future marrying solar panels, advanced storage batteries, plug-in electric hybrid cars, home energy management systems and smart appliances together in a grid studded with new sensors and control devices.

Smart grid technologies will reduce electricity use by more than 4 percent by 2030, saving $20 billion in customer costs that year and cutting greenhouse gas emissions accordingly, the White House said, citing analysis by the Electric Power Research Institute (EPRI). Demands for "peak" power on the hottest summer days could drop by 20 percent. Tens of thousands of new jobs will be created, the administration projects. "We're on the cusp of this new energy future," Obama said at a solar energy center in Arcadia, Fla. "In fact, a lot of it is already taking place."