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The Fed Speaks, but What Does It Mean?

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11/03/2010

The Federal Reserve took center stage in today’s market action, as everyone on Wall Street eagerly was anticipating the release of details of the Federal Open Market Committee’s (FOMC) so-called quantitative easing part II, or QE2. As expected, the Fed kept interest rates unchanged at near-zero levels, but to inject more stimulus into the economy, the Fed announced it would institute a program to purchase long-term Treasury bonds.

The money quote in the Fed’s statement today was the following: “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

The over-under on the Fed’s QE2 was around $500 billion during the next six months at a pace of about $85 billion per month. Today’s announcement was basically in line with what most on the Street thought and, as such, the figures came as no real surprise.

Initial reaction to the Fed’s announcement saw the dollar slide a bit, while bond prices fell and bond yields rose. I suspect that this may be a case of selling the news when it comes to the Fed. I also suspect that we likely are to see a continued slide in the dollar and bonds. The likely decline in bond prices will come with a concomitant rise in bond yields, and that’s what I am going to be watching closely in the weeks and months to come.

A Republican Night to Remember

The midterm election is finally over, and though there are still several seats that are too close to call, the new balance of power in Washington has been set. Republicans decisively captured control of the House of Representatives, adding at least 60 seats and winning at least a 238-seat majority in the lower chamber. The GOP also won five new seats in the Senate, with several still up for grabs. And though Republicans did well in the Senate, they failed to wrestle control of the upper chamber away from Democrats.

I must admit my bias here and tell you that I am happy that there has been a veritable rejection of the Obama administration’s policies in what was indeed a Republican night to remember. The question we are all wondering about now is how President Obama will react to the new makeup of a divided Congress. In a press conference today at the White House, the president didn’t appear to me to understand that it was his policies that voters overwhelmingly rejected last night.

If the president fails to “get it” and continues sticking with his current policies, I think we could be in for a long haul economically. If, however, the president meets Republicans at least part of the way on issues like extending the Bush tax cuts, or not pushing forward on costly schemes such as cap-and-trade legislation, then I think we are likely to see the economy continue building on the slow progress we’ve made in recent months.

Now, it is well known that Wall Street likes gridlock, and I generally think a wrench in one-party rule is a great thing. However, it seems as though gridlock is actually not that great for the markets, at least historically speaking.

According to research conducted by Sam Stovall of Standard & Poor’s, during periods where the White House, Senate and House of Representatives were controlled by one party, the S&P 500 posted its strongest annual performances, gaining 7.6% since 1900, versus 6.8% for all years. Since WWII, the S&P 500 was up 10.7% under one-party rule, versus 8.4% for all years (hat tip to my friends at Minyanville for pointing out the Stovall research).

Stovall’s research under the so-called “Partial Gridlock,” where one party controlled Congress and another party controlled the White House, showed that the S&P 500 posted annual returns that were close to the average for all years, rising 6.8% in the 32 years that fit that situation since 1900 and 7.6% in the 30 years of partial-gridlock since 1945.

Under what Stovall calls the “Total Gridlock” scenario, or a split Congress such as what was voted in last night, the market performed the worst. Since 1900, the S&P 500 rose only 2% per year. Since 1945, the market gained only 3.5% per year.

Of course, this is mere statistical correlation, and it doesn’t mean that we are in for a subpar market performance going forward. But I think it’s important that we don’t consider the results of the midterm election to be a certain harbinger of good times ahead on Wall Street. In order to see another full-blown bull market, we are going to have to see the economy improve substantially. That means the return of jobs both here and globally, and a concerted effort on the part of governments to at least try to rein in spending and cut corporate and individual tax burdens.

Will this happen? I certainly hope so.

The Election's Over -- Now What Do I Do with My Money?

On Saturday, Nov. 6, at 12 p.m. Pacific Time, I will be hosting the most important investor teleconference of the year. I’ve titled this presentation, “The Election’s Over --Now What Do I Do with My Money?” As the title suggests, we’ll be looking at the new makeup of the incoming Congress to see just how the political landscape looks. More importantly, we’ll look at how best to navigate this landscape with your investments.

No matter what the new Congress looks like, you can bet that the Federal Reserve will continue printing money in an effort to pump up the economy. Hey, we all know that the economy is facing some of the most serious challenges that it has endured since the whole financial crisis began. That makes now, perhaps, the most important time to make sure your money is working for you.

In this teleconference, we’ll take a look at:


“The Election’s Over -- Now What Do I Do with My Money,” will help you to devise a strategy that uses targeted ETFs to help you achieve both the growth and the income your portfolio deserves.

This event will sell out, as attendance is limited to the first 800 registrants.

Sign up today and guarantee yourself a spot in the most important teleconference of the year.

ETF Talk: Copper Is Shining Brightly

Soaring prices for gold and silver have led to speculation that metals such as copper could follow suit. If so, a proposed exchange-traded fund (ETF) solely devoted to copper might be worth your consideration, after it rolls out and begins trading in the coming weeks. A registration statement for the proposed new fund, the J.P. Morgan Physical Copper Trust, was filed by the investment firm with the Securities and Exchange Commission (SEC) on Oct. 22.

Copper and other commodities have been rising lately due to the weakening U.S. dollar. When the dollar loses value, commodities gain appeal as an alternative investment. For example, the Comex gold futures posted a late-session rally on Oct. 29 to hit a new, two-week high. Gold rose 1.5% through mid-afternoon on Oct. 29 to reach $1,342 an ounce, while silver climbed 2% to hit $23.81 an ounce during the same time span. Copper finished October at about $3.78, rising for the fourth month in a row. The chart below shows how the commodity has risen since the spring of 2009.

For investors who want to buy copper cost-effectively and conveniently, with minimal credit risk, the new ETF will offer a way to do so. In fact, BlackRock Asset Management International also plans to offer an ETF aimed at copper. No matter what copper fund an investor buys, the creation of such ETFs could fuel the commodity’s rise. Analysts speculate that one of the reasons gold became a popular investment recently stemmed from the launch of ETFs, such as SPDR Gold Trust (GLD), that are tied to the yellow metal.

The advent of gold ETFs has coincided with a jump in gold prices. Investors bought a collective 28.3 tons of gold via ETFs devoted to the precious metal during the third quarter of 2010, bringing the total holdings to a new high of 2,070.1 tons. That new total is worth $87 billion, based on the price of gold at the end of the third quarter, according to the World Gold Council. Indeed, a number of gold ETFs now exist that are competing for inflows into the gold market.

It would not surprise me at all if copper rose in price as ETFs devoted to the commodity are launched. Please keep in mind that a number of factors affect the price of copper. They include: copper supply and demand; changes in expectations about the availability and the cost of mining copper; changes in the price of insuring, transporting and storing copper; and inflation.

If you want to invest in copper, you also should be aware of some of the risks. They include: unexpected global, regional, political or economic incidents; reduced economic activity or recessions, which can hurt demand for physical copper in a wide range of applications; and changes in tax, royalty, land and mineral rights under different political regimes.

The proposed J.P. Morgan fund offers the opportunity to invest in physical copper without the need for you personally to take possession of the commodity and to store it yourself. The trust’s sponsor, J.P. Morgan Commodity ETF Services LLC, arranged to have the Henry Bath Group of companies store and safeguard the trust’s physical copper holdings. Since the proposed fund still has not begun trading, you have time to think about whether you want to buy copper as an alternative investment and particularly as a hedge against a falling dollar.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.

Get Your Precious Metals Watch List

The ETF universe now is teeming with more than 1,000 funds. Yet there is one asset class, particularly this year, that really has captured everyone’s attention -- and that’s precious metals.

Precious metals, like stocks and bonds, are an asset class which represents a great deal of risk along with the potential for big rewards. One of the biggest challenges confronting precious metals investors is dealing with the tremendous volatility in the sector.

We’ve seen this volatility in the premier precious metal, gold, since the value of the yellow metal has gyrated wildly over the past 12 months. Because gold and other precious metals generally are non-stock, non-bond correlated investments, they’ve become very attractive to individual investors, despite their propensity for volatility. This low market correlation is a crucial component for investors who seek diversification within their portfolios.

In our latest special report, “The Fabian Precious Metals Watch List,” we’ve identified 20 precious metals ETFs that give you access to both the bullion and mining segments of the best precious metals available to investors today. To get your free report, simply click here.

Of Elections and Stolen Goods

“Every election is a sort of advance auction sale of stolen goods.”

--H. L. Mencken

The great journalist died many decades before politicians promoted their latest round of fiscal stimulus, but his assessment of elections rings truer now than ever before. As the adage goes -- the more that things change, the more they stay the same.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.

P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.


 

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