§ The dollar is looking better on a relative basis – see the US Dollar Index (USDX)§ Euro is declining as “PIIGs” component of euro is experiencing credit perception issues (Portugual, Ireland, Italy and Greece)§ 60%: Euro is about 60% of USDX § US Dollar Outlook: Its technical features appear strong although long term its fundamental are weak due to the US deficit pictureBottom Line: Consider an investment in UUP, an ETF that is dollar bullish via futures contracts.
S&P 500 has recorded one of the most powerful stock rallies ever since 3/9/09:
§ 676.5: S&P low recorded on March 9, 2009
§ 1102.47: S&P price as of December 18, 2009
§ 62.9%: S&P 500 return since March 9, 2009 low which is one of the most powerful rallies on record
§ 22%: YTD S&P 500 stock market return
Other trends according to Barron’s:
§ 15 million job seekers
§ 5 million vacant apartments
§ Economy running at 71% capacity, versus a four-decade average of 81%, will hold wages and prices down.
§ GDP declined 6.4% in 1Q09 but increased 2.8% in 3Q09 - a 9.2% swing
§ Anticipated 2009 S&P 500 Operating Earnings: $61.33
§ Forecasted 2009 S&P 500 EPS = $76 (24% increase)
Where do we go from here?
Investment professionals have varied views:
§ According to Barron’s, "forecasts for gross-domestic-product growth lie between 2.3% and 4%, well below the average 6% rate of economic expansion historically seen in the year following a recession."
§ 20% return: some investment professional forecast a target for the S.& P. 500 in the range of 1300 to 1350 by the end of 2010, or about 20 percent from Friday’s close
§ 10% decline: many investment professionals predict a short term market decline of more than 10 percent
§ 25% decline: some predict a decline in the range of 20 or 25 percent
§ Up and then down Market: S&P 500 increasing to 1300 before it slides to 1250
§ Interest Rates increase: many believe that the central banks, fearing inflation will raise rates in the Spring of 2010, which will negatively impact stocks
§ Avoid Treasuries: since interests will rise, bond prices will fall. Thus, many forecasters are avoiding the Treasury market
§ Market leaders: consumer staples, health care, technology and industrial shares should take leadership (from financial stocks) in 2010
§ Stock Picker’s Market in 2010: big gains won’t be seen in ETFs and Mutual funds as many investors are leveraging these as opposed to individual stocks. Industry leaders should do well: Apple, Goldman, Oshkosh, Green Mountain
§ International Markets Lead the Way in 2010: foreign markets valuations are much lower than the US
§ Treasury yields are poised to climb higher in 2010, with the median forecast calling for the 10-year note to touch 4.125%.
§ Contrarian View: The pessimistic case is an easier one to digest as it’s focused on our current situation. However, the market looks forward.
The Bottom Line(s):
§ Dollar-cost average into State Street Global Advisors’ S&P500 (SPY)
§ Protect against the downside with S&P Index ETF with options (SH)
§ “Double Short” the market with a leveraged Index ETF (SDS)
§ Avoid Treasuries
§ Short Treasures (TBF)
§ Invest in market leaders such as Apple
§ Invest in foreign markets ETF (ishares = EFA) or mutual fund (Vanguard’s VGTSX)
Source(s): NYT, Birinyi Associates, ETF Trend Playing Handbook, Barron's.com, Google.com  S&P 500 12 18 2009
§ 5%: 15-year fixed-rate loans share of home purchase applications in December 2009
§ 20%: 15-year fixed-rate loans share of refinance applications in October 2009
§ 9.1%: 15-year fixed-rate loans share of refinance applications in October 2008
§ 7.5%: 15-year fixed-rate loans share of refinance applications in October 2007
§ 4.46%: average rate, 15-year fixed-rate loans in mid-December 2009
§ 5.25%: average rate, 15-year fixed-rate loans in mid-June 2009
§ 4.99%; average rate, 30-year fixed-rate conforming loans in December, 2009
Paying a mortgage down early might not be a wise strategy at this time considering the future economic climate.
Since inflation will most likely rise in the future, interest rates will rise, which implies that over the long term the return on investments will be higher than the after-tax cost of borrowed money. The tax benefit from borrowing has its source in the tax code. Interest on mortgage debt is tax deductible. Thus, the after-tax cost of borrowing is lower than the pre-tax cost of borrowing. For example, a 4.46% interest rate for an individual in the 28% tax bracket will translate into a 1.25% after-tax interest rate.
The Bottom Line: Thus, in most cases, it’s financially advantageous to invest the surplus funds (i.e., the difference in monthly payments between 30 and 15 year monthly mortgage payments) into other investments (e.g., commodities, multinational corporations, etc…).
Source(s): WSJ, NYT, Bankrate.com
Natural Gas Industry-related data:
§ $6 & $7.50/MMBtu: consensus estimate long-term natural-gas price range
§ $5.33/MMBtu: 12/15/2009 price
§ $14/MMBtu: record high reached in Summer 2008
§ 5.27%: Natural Gas YTD return (FCG ETF proxy)
§ $2.50: September 2009: 7 year low
§ 3.773 trillion cubic feet: U.S. storage facilities supply (near record)
§ XTO's decision to sell to Exxon: implies that independent producers don't foresee a strong rebound in gas prices
§ 34%: Oil’s share of global energy mix in 2007
§ 0.9%/year: oil annual long-term growth
§ 21%: Natural gas’ share of global energy mix in 2007
§ 1.5%/year: natural gas’ annual long-term growth
§ 45 Trillion cubic feet: about two years of domestic gas demand
§ $81 Billion: 1999 Exxon and Mobil merger
§ 50%: natural gas emits half as much CO2 as coal
§ $1 Trillion: industry investment to develop domestic shale fields
§ Potential takeover targets: Chesapeake Energy, Devon Energy, EnCana, EOG Resources, Range Resources
§ 2.33 Billion cubic feet a day: XTO daily natural gas production output putting it just behind Chesapeake as the top domestic producer.
§ In 2000, price increased from $2.50 to $10 by the end of the year; eight months later, the price slipped to $3.
§ In 2005, prices increased to more than $15 after hurricanes Katrina and Rita and then decreased to below $7 just two months later.
§ In 2008, prices increased to more than $13 but then decreased to $3 this past September and closed Tuesday at $5.523.
§ 46%: % of all power plant capacity additions from 2008 to 2035, according to the The U.S. Energy Information Administration
§ Unconventional Resources: a broad category of fuels (e.g., shale gas, tar sands, etc…) that require complex extraction technology.
The Bottom Line: Investing In Natural Gas (FCG) Might be a Good Long Term Investment
Source(s): WSJ, NYT, International Energy Agency, Google finance
ETF Industry Overview:§ 802 = # of US ETFs as of 11/30/2009§ 30= # of US ETF managers; § 100 = number of ETF liquidated since 2007§ $739 billion = total ETF industry assets (a record)§ 9.8% = number of fixed-income ETFs (79/802)§ $100b = asset value of fixed-income ETFs (100/739 = 13.5%)
2009 Hot Investment: Bond (Fixed Income) ETFs§ $32 billion: 2009 net inflows to taxable-bond ETFs; most of any ETF asset class§ AGG: iShares Barclays Aggregate Bond Fund§ BND: Vanguard Total Bond Market ETFOther 2009 popular ETF categories:
§ Inflation-protected Treasuries§ gold§ Other commodities (oil, grain, livestock, etc…)§ Corporate bonds§ Emerging markets using Vanguard’s VWO and iShares’ EEM§ Bearish funds (leveraged and inverse ETFs) ProShares and DirexionThe Benefits of ETFs benefits relative to Mutual Funds:§ transparency§ liquidity§ low costs§ tax efficiency ETF Management Landscape by assets: 1. BlackRock (Barclays Global Investors)2. State Street3. Vanguard ($90 billion in ETF assets)Investment Thesis:Since higher inflation is ancipated, higher interest rates are anticipated which means that bond prices will fall. A common approach to profiting from falling bond prices is to invest in short bond funds such as TBT.
The Bottom Line:
Investing in a short bond ETF (TBT) might be a profitable contrarian strategy. § TBF [20+ year treasury]; $49.83; Mkt cap 209M; Ave Vol = 169k§ PST [Ultrashort 7-10 year treasury] $52.33; Mkt cap 347M; Ave Vol = 122k§ TBT [Ultrashort 20+ year treasury]; $48.61; Mkt cap 4.5B; Ave Vol = 4.79MSource(s): WSJ, Vanguard, Morgan Stanley, State Street, Google.com, Yahoo.com, Proshares.com
2009 Inflation-Hedging Market Data:
§ $59 billion: the 2009 increase in the “inflation hedging” investment category (i.e., Gold, inflation-protected bonds, commodity funds and commodity exchange-traded fund)§ ($52 billion): the 2009 decrease in U.S. stock funds and ETFsTypical, Inflation-Hedging Investments: § Gold § Commodities§ Energy, Materials and Consumer Staples (food and tobacco) stocks§ Companies with strong pricing power (Coke)§ Some debt (e.g., High-yield debt, lower-rated investment grade bonds)§ Short-term debt (that is less susceptible to the higher interest rates associated with inflation and permits re-investment at higher rates)
Inflation Data:§ (0.2%): CPI (October 2009 year over year change)Will Inflation Pick Up?§ No. Since unemployment will remain high; unused capacity should facilitate economic growth without an increase in prices (i.e., inflation) § No. Stock and bond markets aren't pricing in a rise in inflation; TIPs pricing indicates inflation is expected to be less than 1% in 2010; 1.5% over the next 5 years; 2.1% over the next 10 years§ Yes. There’s a huge amount of liquidity. And, when banks accelerate their lending practices again, inflation will rear its headTIPs or I-Bonds?Read some opinions here
TIPs or the S&P 500 Index:
According the chart below, the November 2009 YOY (11/30/08 – 11/30/09)results:
§ S&P 500: 25.3%
§ TIPs (Vanguard VIPSX): 19.3%
The Bottom Line: over the long-run, inflation increases; TIPs offer inflationary protection and could be a good addition to a well-diversified portfolio.
Source(s): WSJ, Vanguard.com, Morningstar.com
 TIPs vs. S&P 500
Concept: buy-write (long-short) funds try to reduce volatility by selling stock options to generate extra income on their stock portfolios.
§ In bear markets: the strategy can work because income from the options offsets declining stock prices somewhat
§ In bull markets: the stock gains are reduced due to option payouts
Buy-Write ETF:
§ PowerShares S&P 500 BuyWrite ($135 million) ETF (PBP), tracks a well-known buy-write index
§ In 2008, 30% decline vs. S&P 500 Index’s 37%.
§ In 2009, 22% increase vs. S&P 500 Index’s 24% S&P 500 Index
Buy-Write Fund:
§ 4.7 billion Gateway Fund (GATEX)
§ In 2008, 14% decline vs. S&P 500 Index’s 37%.
§ In 2009, 6% increase vs. S&P 500 Index’s 24% S&P 500 Index
§ Morningstar.com: 3 stars
§ Load: 5.75%
§ Expense ratio: 0.94%
The Bottom Line: In a declining market such as 2008, buy-write funds look compelling.
Source(s): WSJ, Morningstar.com
§ This week's Barron's magazine writes that unemployment number is a leading economic indicator.
§ Others such as the Business Insider have indicated the same this year.
The Bottom Line: It will be interesting to see if the unemployment number turns out to be a leading economic metric.
§ Average US mortgage rates have fallen to their lower levels since the 1940s: 4.8%. This is rare. The only other period in which rates were below 5% was WWII to 1952.
§ These rates won’t last much longer as the Federal Reserve’s $1.25 trillion mortgage-based security investment program is set to expire in March.
§ Some analysts forecast 6% rates by April, 2010. Using an online mortgage calculator, the monthly mortgage payment would increase from $2,187 to $2,500 or $313 (14.3%). This assumes a $417,000 loan (the maximum conforming loan).
§ Currently, 60% of homeowners have mortgage rates greater than 4.8%
§ Mortgage applications to purchase houses are at their lowest level in 12 years.
The Bottom Line: Now might be the time to invest in a new mortgage or refinance an existing one.
Source: NYT, Bankrate.com
Analyzing historical stock market patterns, points to a possible near term correction.
“From Worst to First in the New Bull” phenomenon: history indicates that stocks that decline significantly in a market correction phase tend to outperform the rest of the market in the next upturn. Cases in point:
1. In 1990: health care led the market in the new bull run
2. In 2003: technology led the market in the new bull run
3. Since March 9, 2009 lows: financial stocks, which declined precipitously in 2008, have appreciated more than 130%. However, technology and healthcare are taking leadership now.
“Small Caps Lead the New Bull” phenomenon: history indicates: that small-capitalization stocks fare better at the start of bull markets. Since March 9, 2009 lows: Small capitalization stocks gained 76% vs. 52% in current bull market. However, since October, 2009 large caps are now outperforming small caps by 4%.
“S&P 500 Dividend Aristocrats Payers” phenomenon: in the second years of the last two bull markets, dividend paying stocks have gained 6% more than the S&P 500.
“The 10% correction New Bull Market pattern”: Since 1932, every bull market has had at least one 10 percent correction before peaking.
“The 10 month New Market pattern”: the typical bull market declines by 10 percent at some point within its first 10 months.
Source(s): NYT, S&P
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