SET Monthly Issue October 2010

| October 19, 2010

October 2010


The Fed has a solution to our economic woes… Destroy the US Dollar.

…After all, a weak US Dollar is good for exports.  And 46.6% of sales by S&P 500 companies come from outside the US.

But that’s just part of the story.

In short, the Fed has said more quantitative easing (QE) is coming.

QE is when the Fed creates money out of thin air.  Then they use the money to buy US Treasuries and in some cases mortgage-backed securities.

It effectively lowers interest rates and devalues the US Dollar.

The Fed’s hoping QE will jump start economic activity and ward off deflation.  And all else being equal, lower interest rates should provide a boost to economic growth.  And a weaker dollar should cause prices to rise.

Right now the market is pricing in around $1 trillion of QE.  But we still don’t know how much or how fast the Fed’s funny money will be pumped into the system.

The problem is QE has its drawbacks.

First off, jump starting inflation by printing money can be counterproductive.

We’re already seeing commodity prices skyrocket.  This is a direct result of the impending QE.  Investors are fleeing the weakening US Dollar for commodities.

Then as the dollar weakens, commodities become cheaper in other currencies. Resulting in international consumers buying more and driving prices even higher!  So you get a double whammy pushing commodity prices higher.

And while higher commodity prices help stave off price deflation, they can also hurt the consumer.

Think of it this way…  A run-up in consumer prices ahead of wage growth hurts the consumer.  Real incomes fall in terms of purchasing power.  So QE ends up working against a rebound in consumer spending.

So there’s a give and take with QE…  It can have a positive impact on economic growth but there are also some drawbacks.  But the Fed feels the cost of doing nothing outweighs the risks.

At this point, the coming QE is priced into the market.  But the dollar devaluation is likely to continue.  And any hint of inflation should drive commodity prices even higher.

With that in mind, we’re adding two new positions sure to benefit from higher commodity prices and a weaker dollar.  But the best part is they’ll also benefit as economic growth strengthens.


The clouds are parting for the solar industry.

The collapse of oil prices and economic downturn in 2008 turned the lights out in the industry.  Since then, the solar industry has undergone major changes.

The solar market shifted from supply constricted to demand-driven in just the last few years.  Now solar stocks are making a big comeback.

One thing’s for sure…  Harnessing the power of the sun is key to solving the long term energy puzzle.  The sun is essentially a limitless source of clean renewable energy.

But the cost of converting sunlight into energy has made it expensive relative to other sources like fossil fuels.  As a result, solar has been stuck on the back burner for years.

Now advancements in technology and the rising cost of fossil fuels are making solar a viable alternative.  And with the focus on reducing greenhouse gases, solar is once again in the spotlight.

Macro/Economic Trend:  Grid Parity Driving Growth

Right now solar power contributes a very small portion of our energy supply.  Experts pegged it at less than 1% of all energy used in 2008.

But the industry is expected to grow more than 25% per year over the next few years.  That’s huge growth any way you slice it.

And even more importantly, revenues and margins of low-cost manufacturers are exceeding expectations.

Now some experts are expecting lower-cost products to drive demand up by 43%from last year.

The growth is expected to be global in nature.  Countries like the US, China, Germany, Italy, Japan, and France are leading the charge.

The key to rapid growth in solar is grid parity.

Grid parity is the point at which alternative means of generating electricity (like solar) is equal in cost or cheaper than grid power.

And according to a recent industry report, the new technology will cause solar to reach grid parity by 2013.  Much sooner than expected…

The result?

The solar industry is a viable alternative to other energy sources.  And theGuggenheim Global Solar ETF (TAN) is a pure play on a global solar boom with holdings in Chinese, German, and US solar companies.

Fundamentals:  A closer look at TAN

TAN holds 32 solar company stocks from around the globe.  Chinese, German, and US based companies comprise nearly 84% of the ETF holdings.

The expense ratio is 0.65%.

The top five holdings and percentage weight for TAN are –

Company Name Ticker % Weight
First Solar FSLR 12.25%
Renewable Energy REC 6.47%
Trina Solar TSL 5.92%
MEMC Electronic Materials WFR 5.39%
Meyer Burger Technology MBTN 5.30%

The international companies in TAN provide exposure to the hottest solar markets around the globe.

Technicals:  The charts lead the way

TAN snapped out of a long term downtrend in June.  Since then, it has shot up more than 47%!

But it’s still a long way off the highs it set back in 2008.  In fact, it needs to go up nearly 250% to get back to where it was in May of 2008.

Take a look at the chart below.  You can see it’s developing a strong uptrend.  TAN has already set a series of higher highs and higher lows since bottoming out in June.

In just the last few weeks, we’ve seen two bullish moving average crossovers.  The 20-day moving average has crossed over the 50-day moving average and the 200-day moving average.

And we’re now just days away from the 50-day moving average crossing over the 200-day moving average.  These are all signs bullish momentum is now in control.

Clearly, TAN has momentum and is now in strong uptrend.

Trade Alert

Buy:  Guggenheim Global Solar ETF (TAN) up to $9.50
Recent Price:  $8.89
Price Target:  $14.25
Stop Loss:  $7.00

Remember:  TAN is in a strong uptrend with bullish momentum.  But it’s had a big run since June.  It could easily pullback to the 20-day moving average around $8.50 before resuming its rally.  But the improving fundamentals and strong growth estimates will drive TAN much higher from here in the long run.


Sometimes I want to have my cake and eat it too.  Really, what good is cake if you can’t eat it…

But in all seriousness, investments that have more than one catalyst give investors the ability to… well, have their cake and eat it too.

Platinum and the companies who produce the rare metal are one of those investments.

Let me explain…

Platinum has a dual role as both a precious metal and an industrial metal.  This blend of qualities makes platinum miners explosive.  They are uniquely positioned to profit from both rising commodity prices and economic growth.

This dual role has lit a fire under platinum prices and the companies who produce it. And with the Fed announcing plans for another round of quantitative easing, platinum is poised to reach new heights.

Macro/Economic Trend:  Dual Threat

First off, as I discussed in the opening, the Fed’s coming QE is devaluing the US Dollar. And it’s stoking fears of inflation down the road.

In an inflationary environment, precious metals are valued as a store of wealth.  And platinum’s role as a precious metal will cause it to rise in value as a hedge against inflation.

Platinum is pretty cut and dry as a precious metal.  Like gold and other precious metals, it will increase in value as currencies are devalued and price inflation sets in.

But that’s just part of the story…

If inflation is tame and economic growth accelerates, platinum will benefit from its role as an industrial metal.

The main industrial use of platinum is in the automobile industry.

It’s used to make catalytic converters.  They’re part of the exhaust system designed to reduce the amount of harmful emissions.

And that’s not all…

Platinum is also used in manufacturing of data storage disks, glass, paint, nitric acid, anti-cancer drugs, fiber optic cables, fertilizers, gasoline, and fuel cells.  And, of course, to make jewelry.

Clearly, platinum is a unique investment.  The industry sees two big profit drivers from inflation and economic expansion.

What an opportunity!

Here’s the bottom line…  As the price of platinum goes up, the companies who mine this rare metal become more profitable.  And the First Trust ISE Global Platinum Index Fund (PLTM) is a unique ETF made up of companies who focus on mining platinum.

Fundamentals:  A closer look at PLTM

PLTM holds 25 US and international stocks of platinum producing companies.  They must be actively engaged in some aspect of platinum mining such as mining, refining, or exploration.

Note the strange tickers are stocks trading on international exchanges.

The expense ratio is 0.70%.

The top five holdings and percentage weight for PLTM are –

Company Name Ticker % Weight
Johnson Matthey JMAT.LN 7.10%
Impala Platinum IMP.SJ 7.09%
Lonmin LMI.LN 7.07%
Anglo Platinum AMS.SJ 6.94%
MMC Norilsk Nickel MNOD.LI 6.78%

Technicals:  The charts lead the way

PLTM recently broke out of a three month consolidation pattern.  In mid-September, the 20-day moving average made a bullish moving average crossover.  It crossed the 50-day moving average to the upside.  Since then, it has shot up more than 15%!

But PLTM still has plenty of room to run…

In short, PLTM is still 10% off its 52-week high.  This is in sharp contrast to other precious metal miners who are at all time highs.

And as far as platinum itself… It’s trading for around $1,600 per ounce.  But its all time highs are close to $2,300!  That’s more than 43% higher than the current price.

Clearly there’s still plenty of upside for both platinum and the miners.

Trade Alert

Buy:  First Trust ISE Global Platinum Index Fund (PLTM) up to $32.75
Recent Price:  $31.64
Price Target:  $42.00
Stop Loss:  $27.00

Remember:  PLTM is rocketing higher along with platinum prices.

Consumer Discretionary (+6.0%)

Consumer discretionary stocks are looking up.

The sector has posted better than 6% gains in each of the last two months.  And don’t overlook advance retail sales coming in better than expected at 0.6% month over month.

Our position in iShares Dow Jones U.S. Consumer Services Sector Index Fund(IYC) has moved beyond our buy up to price.  We hit a new peak gain of over 7% last week.  Continue holding IYC for further upside.
Consumer Staples (+3.8%)

It’s the same story for consumer staples as last month…

The sector continues to march slowly higher.  In fact, it’s nearly back at pre-crisis levels…  Then again, it didn’t fall nearly as far as more cyclical sectors.  But it could face heavy resistance at its all-time highs.

Energy (+9.9%)

Energy stocks took off like a rocket along with oil and other commodities.  Oil is now testing the upper limits of the trading range near $85 per barrel.

Our Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ) has followed oil prices higher.  We hit a new peak gain of nearly 17% last week.  Hold tight for further gains.

We’re also adding the Guggenheim Global Solar ETF (TAN) this month…  See Trade Alert 1 for more details.

Financials (-1.8%)

Financials continue to lag the broad market rally.

The recent foreclosure scandal has certainly hurt investor sentiment.  The legal charge is being led by state attorney generals.  I think this is a political ploy by incumbents prior to the mid-term elections.  Once elections are over, I believe this mess will get swept under the rug.

Our SPDR KBW Bank ETF (KBE) is still below our buy up to price.  But once the rumors surrounding foreclosure-gate fade, banks should get a nice rally.  The reality is the industry is getting healthy…  Go ahead and buy KBE up to $23.50 if you haven’t already.

Our iShares Dow Jones U.S. Real Estate Index Fund (IYR) hit another peak of over 14% last week.  REITs are looking strong and should continue to rally.  So hold tight for further gains.

Healthcare (+4.0%)

Healthcare stocks turned in another solid month.

The industry is benefiting from hope.  Investors are hoping Republicans take control of Congress in the mid-term elections.  If so, they could seek to undo healthcare reform. But undoing the reforms is highly unlikely…  I’ll be watching this sector closely going forward.

Our iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) and First Trust Biotechnology Index Fund (FBT) are both breaking out to new highs.  IHE is up 16% and FBT is now up 10%.  Hold tight for now.

Industrials (+5.0%)

Industrials have strung together three solid months in a row.  In total, they’re up 14% in three months.

We’re going to take our 13.5% profits in the Dow Jones Transportation Index Fund(IYT).  We got a nice pop this month to push IYT back near the 52-week high.  So go ahead and sell IYT now.

And don’t forget, we still have some exposure to transportation stocks with ourGuggenheim Airline ETF (FAA).  FAA is already up 8.5% in the first month!  Continue holding FAA for further upside.

Technology (+6.9%)

Tech stocks have put together back to back months of greater than 6% gains.  Clearly the sector is regaining some of its mojo.  And with juggernauts like Apple (AAPL) leading the way, the sky is the limit.

Our iShares S&P North American Technology-Software Index Fund (IGV) has gone into a consolidation phase.  But it’s holding near the recent highs.  It’s only a matter of time until IGV takes off again.  Go ahead and buy IGV up to $55.

Our SPDR S&P SEMICONDUCTOR ETF (XSD) is continuing the uptrend off the August low.  Industry bellwether Intel (INTC) reported better than expected 3rd quarter earnings and increased their 4th quarter guidance.  Clearly, this is good news for the industry.  Hold tight for now.

Materials (+5.7%)

Materials stocks are benefiting from the collapse of the US Dollar.  It’s led to three solid months of gains.  In total, the materials sector has surged 15% in that time.

We’re adding the First Trust ISE Global Platinum Index Fund (PLTM) to ride the wave of dollar destruction and commodity price explosion…  See Trade Alert 2 for more details.

Utilities (+3.4%)

Utilities have made another push higher recently.

One catalyst investors are looking at is the impact of more electric cars on the road. The federal government has made a big push on fuel efficient cars.  And electric cars play a key role in achieving this goal.  Utilities will likely benefit from increased electricity consumption to fuel the new breed of electric cars.

Our Utilities Select Sector SPDR Fund (XLU) hit a new 52-week high yesterday.  Hold tight for further gains.

Portfolio Changes

  • This month we’re buying TAN & PLTM.
  • Sell iShares Dow Jones Transportation Index Fund (IYT) for a 13.5% gain.


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