Investing Without Money Printing


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Investing Without Money Printing

When determining the one topic to discuss in the Market Situation Report each week, I reflect on what happened during the past week; both obvious and obscure.

There are other weeks, like this week, where the one topic is very clear.  This week, it is Ben Bernanke’s speech.  The content of the speech made the markets go crazy, and I learned how we can best protect ourselves if the worst happens.

So, let’s review his comments and what happened in the market so that you can better position yourself for what is coming our way.

My first thought is that it seems like the market read Bernanke’s conversation as, “We WILL end money printing and it WILL end mid-2014.”  What he actually conveyed was: if three things continue to happen, we will take our foot off of the gas pedal until we are back to buying zero U.S. treasuries and mortgage-backed securities. 

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The three things (paraphrased by me) that need to continue to happen are:

– The economy needs to stay robust

– Unemployment needs to continue to go down

– We need to continue to see prices increase

Unfortunately, the market misinterpreted his message to indicate that Bernanke was going to stop printing tomorrow because everything is looking great.

So, based on that misinterpretation, I am wondering the following:

–          Who or what (companies or sectors) will benefit the most from
higher rates?

–          Who or what will benefit the least from higher rates?

–          What did we learn from Wednesday until Friday, close of market?


The first thing we learned is that when people panic, they still panic into the U.S. Dollar.  When people are scared, they buy the U.S. Dollar over any other currency or asset in the world.

Look at the image below.  The bottom of the red arrow indicates where the U.S. Dollar was when Bernanke made his speech and the top of the arrow indicates where the market closed on Friday.

 

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The blue line on the image above is May 22nd, when the word “taper” was introduced to the world.  Again, the one place that people turn during panic is to the U.S. Dollar.

The second thing that we learned is those who own any investment vehicle based on the yield or interest rates that they get from it, will be most affected and most hurt by the decrease in money printing.

Although I could have picked from several price charts, I chose TIPS (Treasury Inflation Protected Securities), because many people buy them.  They buy them because principal goes up when inflation goes up.  If you buy a TIP at $100, and inflation goes up by 2% that year, the TIP goes to $102. However, the yield does not change.

Look at the screen below, which shows TIPS falling from 122 to 110.  TIPS are supposed to be very safe and have low-volatility.  However, within six weeks, five to six years of yield were taken off.

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In the future, people will get hurt by any investments that have a downside to increased yields, such as bonds or stocks that provide high yields.

Unfortunately, people in their 50s, 60s and 70s have their money in high-yielding instruments, and they have been hit the hardest in the last week/month, which is sad.

Below is a price chart of the S&P 500.  Because every other country’s index did worse than the S&P 500, there was no need to show any other indices.  As you can see on the chart below, when Bernanke made his announcement, the stock market broke down.  It broke below strong support point.

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I looked at the world of investments, such as stocks, ETFs, close-end funds, open-end funds, mutual funds, etc. to find out what didn’t go down.  If something didn’t go down, that sector/industry/company is potentially going to like and benefit from an increase in interest rates.

After looking at thousands of charts, I found three that did not go down after Bernanke’s announcement.  I will share two of them with you.  Both of them are in the same sector.  The point of sharing this?  To remind you that there are places to move your money.

The two that I am sharing are in the Financial Services sector, which is a very large sector.  Out of fairness to my paid clients, I cannot reveal the sub-sector.  Notice on the chart below that the sub-sector did not break down.  Although it appeared to go down a little, it was still within its range.  The chart below shows the first sub-sector that I found. Notice its strength.

 

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Considering that most of the sectors broke down, the fact that this sub-sector didn’t break down is important.

Look at this next chart showing the second sub-sector.  Although it may look similar to the last chart, this one really didn’t break down at all.  It just consolidated and wouldn’t mind having higher interest rates for their sector and all of their businesses.  That is powerful to see.

 

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What I learned most from Wednesday until the close of the stock market on Friday, was that there are two sub-sectors that will benefit the most from higher interest rates. Maybe more, but at least two.

The take-away from this is that there are places to look to find those who will benefit from higher interest rates.  You want to have your money in a strategy that can adapt to what is going on.  There are strategies that will adapt for you and tell you where to put your money.

Ultimately, the strategy will determine your outcome; not the ticker symbol, sector or asset class.  Although I pointed out two sub-sectors for you, it is the strategy that tells you how to buy, how to own, how long to own and, if they move against you, how to manage the loss.

This past week, I did an in-depth conversation that was all about how to invest without money printing.  I went into detail about what you can do with your money and how to protect yourself.    To see the replay of that conversation, click here.

Together, we are growing and protecting your wealth,

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