Word to the Wise

The heightened level of price volatility, political uncertainty and technical cross-currents has made for a very tense and trying week. U.S. equity indices rallied strongly into the Labor Day holiday as expected, and like clockwork, topped early in the trading session of Sept. 1. From the peak reading on Thursday morning to the open trades on Tuesday, Sept. 6, the SPDR S&P 500 ETF Trust (SPY) plunged over 7%. In Germany, the decline was even steeper, as the DAX was clocked for 11% during a similar period. It seems almost futile, and foolish, to try to forecast market movements of more than a few days in such an environment. Yesterday morning at 2:00 a.m. EDT, gold fetched over $1,920 an ounce. My suggestion for a chicken long equity surrogate via shorting the gold market appeared poor at best and awful at worst. But as of 10:30 a.m. EDT, it is clearly in the black, especially with option volatility soaring and my expression of the trade made with long put positions. Gold -- 10-Day Source: Bloomberg View Chart » Of course, by 2:00 a.m. EDT Thursday evening, I may once again assume the role of idiot savant, quite light on savant and quite heavy on idiot! In any event, I continue to stick with the trade for now but am selling additional October 160 puts ($2.25) to lock in the much higher implied volatilities. Over in the silver pit, a TD 13-9 sell is in place according to my main DeMark analyst, Kerry O'Dowd of Stifel. I will look to sell any short-term bounces. Given my current, and rather severe, economic and market concerns, I have been carrying rather high levels of cash and bonds in all accounts, including my most long-term oriented. In Casa speak, that registers in excess of 80%. Given the recent extreme intermediate oversold readings in most markets, however, I worked hard over the long weekend to indentify investible vehicles for our readers that I believe will offer diversification and deliver respectable risk-adjusted returns (read: positive) over the next several quarters. I have established long positions in all three over the past twenty-four hours. WisdomTree is an excellent source for exchange traded funds that hold portfolios of assets much different than those typically found in most other ETFs. As an example, I was looking to establish a long position in the global REIT market, excluding the U.S. (since there are plenty of real estate securities listed on U.S. exchanges). It was no surprise to me that WisdomTree has an ETF called WisdomTree International Real Estate Fund (DRW). Although it is heavily weighted toward Australia- and Hong Kong-based companies (47% cumulative), and retail REITs (25%), this may not be such a bad thing. The SEC 30-day yield as listed on the WisdomTree website is 4.67%, but the 12-month distributed yield is 15.4% (all income). DRW is off over 50% from its launch date price, and over 9% from the end of third-quarter 2009 levels, so I have no fear of buying the high. I picked up shares at $25.40 and will look to accumulate more on further weakness. DRW -- Weekly Source: Bloomberg View Chart » Another offering from WisdomTree that I purchased yesterday is the WisdomTree Dividend Top 100 Fund (DTN). With an SEC 30-day yield of 4.13% and a distribution yield of over 3.06%, this is an excellent product for retirement accounts and trusts. Once again, with the ability to cherry pick financial exposure in the U.S., which as a sector has been a disaster anyway, the benefit of this portfolio is its extremely defensive construction (as in defensive issues). The fund is 15.6% allocated to consumer staples, 15.2% to utilities, 10.1% to telecoms and 8.9% to health care. The ETF holds 78 securities, with the largest allocation to CenturyLink (CTL), at 2.52%. The next highest allocation is to FirstEnergy (FE), at 2.29%. In short, this portfolio is far different than most others you will encounter in either the ETF or mutual fund space. DTN -- Total Return Analysis Source: Bloomberg View Chart » This portfolio has performed quite well from the market peak in 2007, falling less than 5.4% (1.54% annually) with dividends reinvested. Unfortunately, the shares are up smartly from yesterday's open, but can be bought on any pullbacks near $46.75. Last but not least, I began an investment position in iShares FTSE/Xinhua China 25 Index Fund (FXI) yesterday for the first time in a few years. Although this is not an ETF offered by WisdomTree, it is keeping with today's wisdom theme. A market that is in a cyclical bear orchestrated by a central bank generally is a more desirable investment than one in which the politicians, bankers and businesses are at a loss to solve, in spite of zero interest rates. So, although Chinese shares may continue to decline, the probability that at least an intermediate low is in place is rather high. If Chinese shares continue to cave, I fear what that implies for the developed market economies. I plan on adding in 10% scales. FXI -- Weekly Source: Bloomberg View Chart » Equity markets continue to be whipsawed by political maneuvering across the globe. Asian markets are in the clutches of a monetary cooling process engineered by central banks. The European community continues to struggle with a currency constructed on an extremely weak foundation, and the debt problems at the periphery continue to fester and impede growth. The U.S. politically is by far the worst I have experienced in my lifetime, and the Fed is out of meaningful bullets -- all they have left are the rubber variety. It is one fine mess we are in; trade and invest accordingly.

Word to the Wise

As we continue to find ourselves in one fine mess, trade and invest accordingly.

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