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4 Macro Investments for 2012 - 8815 views
BALTIMORE (Stockpickr) -- Forget about stocks -- it’s time to turn “macro” for a moment.
While most individual investors focus themselves solely on stocks, that’s a recipe for some major missed opportunities in this environment. Instead, it makes sense to add a global macro strategy to part of your portfolio. In short, global macro is all about making broad economic bets on everything from interest rates to emerging market stocks -- tools such as flow of funds analysis and economic theory are paramount.
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That blend of technical and fundamental factors provides a more complete picture of the broad market. And it’s been the strategy behind some of the world’s most successful hedge funds. So how can you put a global macro strategy to work for your portfolio?
The global macro picture has been shifting dramatically in the past few months. From sinking stocks and Europe's debt debacle to the fading glimmer of gold, this hasn't been an easy market to participate in.
Here's a look at four investments you should be positioning yourself into as we approach 2012.
SPDR Gold Trust
Gold has been under pressure lately. Since the start of September, gold prices have been drilled around 5% lower -- not exactly the sort of price action you’d expect from an asset that’s traditionally thought to trade opposite stocks. But, frankly, most investors take the wrong view of gold; with no intrinsic value, flow of funds is a crucial component in determining gold’s worth as an investment.
Keep in mind that there’s a big difference between saying that gold has no intrinsic value and saying that it has no value. Gold certainly has value (it’s valued just shy of $1,800 per ounce at last count), but it’s best to think of the metal as a currency rather than a commodity. People buy gold because it’s a proxy for money -- one that isn’t impacted by the factors that cause the ebb and flow of the dollar or euro. But if that’s true, why did gold slump in the last few months?
I’ve been harping on this for the last couple of months: The biggest reason is that there haven’t been “fundamental” buyers of gold lately. Instead much of gold’s 2011 rally has been because it’s an anti-stock trade, one of the few options out there for investors who want to escape the volatility in stocks. The biggest indicator of gold’s anti-stock status is the fact that gold and treasuries (two ideologically disparate asset classes) have been trading in lockstep with one another.
The Fed’s Operation Twist announcement artificially boosted demand for treasuries back in September, sapping demand from gold as one anti-stock trade suddenly became marginally more attractive than the other.
Even so, now’s a good time to get back into gold through the SPDR Gold Trust (GLD).
For starters, gold has been showing some technical signs of strength since the end of October. At the same time, volatility in stocks has been rampant (today’s drop in the S&P 500 is a perfect example), and the spread between stocks and treasuries has been closing for the last month.
More significant is the potential impact of inflation. Operation Twist showed that the Fed is running out of options to stimulate the economy; reducing or eliminating the rates being paid on banks’ massive excess reserves would effectively force more private lending -- and balloon the money supply at the same time, ratcheting up inflation. That’s a perfect scenario for the gold “currency” to rally.
Of course, GLD isn’t your only option for gold exposure. Another interesting one is Newmont Mining (NEM), the world’s second-largest gold miner. One of the most attractive attributes in Newmont is the discount that this stock has been sporting lately.
Miners as a group have failed to mirror gold’s rally in 2011, even though gold spot prices flow directly through to their income statements each quarter. That disconnect makes miners particularly attractive right now.
Newmont addresses some of that gap by locking its 2% dividend payout to the price of gold. The fact that investors’ fortunes are aligned with Newmont’s makes this a unique way to make a macro bet on gold.
iShares MSCI Mexico ETF
When I said to “forget about stocks” earlier, I was talking about U.S. stocks. Elsewhere, major opportunities are emerging on a macro front. The BRIC economies have held most American investors’ attention for the last few years, but that’s not the market that looks the most attractive right now. Instead, there’s significant relative strength in Mexico right now; the way to play that is the iShares MSCI Mexico ETF (EWW).
While Mexican stocks do suffer from some correlations with the S&P 500, the country’s technical robustness has helped to maintain an edge over the U.S. market. As one of our major trading partners, it’s also one of the biggest beneficiaries of the dollar strength that we’ve seen since uncertainty crept back into the market; a bullish U.S. dollar means positive foreign exchange gains for Mexican companies.
Obviously, that argument doesn’t hold up under the inflationary scenario that makes gold so attractive. But that’s a longer-term possibility on a more intermediate term, U.S. markets are likely to remain anxious and the popularity of the anti-stock trade should keep the dollar at high levels. Look to EWW as an above average way to play macro strength in stocks.
IQ Hedge Macro Tracker ETF
The biggest detractor about any of the previous three names is that they require a hands-on approach; if macro factors shift (if the Fed changes rates on excess reserves), you need to be ready to shift your positions. A more turnkey solution is the IQ Hedge Macro Tracker ETF (MCRO), a relatively newer fund that tracks a basket of hedge funds with a global macro bent.
They key to this fund is risk-adjusted return -- not absolute return. In other words, it should provide exposure to global macro themes while reigning in its risk. As a result, investors should expect its returns to be comparatively muted when markets are swinging wildly.
One consequence of using an ETF to gain exposure to a global macro strategy is the cost. You’re paying 1.09% of your assets for money management with MCRO -- vs. nothing if you apply a macro strategy yourself. While the turnkey nature of this ETF makes it an attractive alternative, hands-on investors will prefer managing their own macro investments.
To see these four global macro trades in action, check out the Global Macro 2011 portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.