SET Monthly Issue September 2012

| September 18, 2012

September 2012


The wait is over… QE3 is here.

Fed Chairman Ben Bernanke unleashed a third round of quantitative easing (QE3) on the US economy.

The Fed is committed to buying $40 billion of mortgage-backed securities every month.  And they’ll continue buying them until the labor market improves.

Look, I honestly don’t know how much impact QE has on the real economy.  But the way this round of QE is set up just might work…

Don’t forget, business owners and managers have been slow to hire new workers.  And the main reason they’ve given for not hiring is uncertainty.

Think about it, the people who make the decision to hire new workers saw an economy that was barely growing… even with the influence of the Fed’s previous efforts.

They knew the impact of the previous QEs would only last for a short period of time.

And then what?

That uncertainty about a future without QE made businesses less likely to hire new workers.

Businesses simply didn’t want to risk wasting money on hiring and training new workers if they would be forced to fire them as soon as QE ended.

Now the Fed has an open-ended QE. It removes the uncertainty about what will happen to the economy when the current round of QE ends.  Because it’s not going to end until the economy improves.

In the context of creating a policy to encourage businesses to hire workers, QE3 is a stroke of genius.

What’s more, now that the US has embarked on another round of QE, I’m expecting more central banks around the world to follow suit.  It’s almost a foregone conclusion that China will announce some sort of stimulus for the Chinese economy in the coming weeks.

A loosely coordinated effort by the central banks of several major economies will certainly spark optimism for a revival of global economic growth.

I’ve already recommended a number of ETFs that should do well under QE3.  And I’ve got another ETF for you that should deliver as QE3 ignites investors’ animal spirits.


Now that QE3 is here, investors are asking one simple question…

How do I profit from QE3?

One thing’s for sure, there are no shortage of answers.

Hard assets and basic materials get most of the attention.  Most investors believe QE3 will either jumpstart the economy or spark inflation (or possibly both).  And both of these situations should cause hard asset prices to rise.  And as the asset prices go up, the companies that mine or develop them become more valuable.

But if you dig a little deeper, there are other sectors and industries that should benefit from QE3 as well.

It’s no secret, the Fed wants labor market conditions to improve.  And QE3 is their attempt to break the vicious cycle of fear and uncertainty that’s prevented businesses from ramping up hiring.

At this point, they’ve guaranteed that short term interest rates will remain near zero until 2015.  And they said QE3 will continue until labor markets improve.

In other words, Fed Chairman Bernanke has opened up his checkbook.  He’s signed a blank check.  And said don’t worry about repaying me until you’re all filthy rich.

Well, QE3 might not make us all filthy rich.  But it’s almost guaranteed to fuel accelerating economic growth.  So, investing in industries that are equipped to capture this growth is the key.

In my opinion, companies in the tech sector are the best equipped to turn accelerating economic growth into higher revenue and earnings.  And more specifically, stocks focused on the internet should reap huge rewards.

I believe we’re at a point where several different variables are converging to send internet stocks soaring.

Macro/Economic Trend:  Monetizing Mobile

First is the mobile computing revolution.  Internet usage on mobile devices is doubling every year. And it’s just the tip of the iceberg for mobile.

For instance, Apple’s (AAPL) iPhone 5 is being released in more than 100 countries around the world.  That’s up from around 85 countries when the iPhone 4s was released just a year ago.

Clearly, mobile devices are putting the internet into more hands than ever before.  And it will continue to grow for years to come.

Secondly, internet companies have adjusted to mobile internet.  They’ve realized the world’s no longer dominated by desktops.  And they’re finally equipped to monetize the internet on mobile devices like smartphones and tablets.

And the final variable is QE3 and other central bank stimulus.

Put simply, this is a new era for internet companies.  Internet usage on mobile device is soaring… internet companies are equipped to monetize mobile… and central banks are embarking on massive new monetary stimulus packages to fuel economic growth.

The First Trust Dow Jones Internet Index Fund (FDN) is a sure fire way to grab the best internet companies who are on the cutting edge of monetizing mobile internet.

Fundamentals:  A closer look at FDN

FDN holds 41 companies that generate at least 50% of their revenue for the internet.
The expense ratio is 0.60%.

The top five holdings and percentage weight for FDN are –

Company Name Ticker % Weight
Google GOOG 10.79% AMZN 8.16%
eBay EBAY 6.76% PCLN 4.78% CRM 4.39%

Technicals:  The charts lead the way

FDN currently trades for $38.41.  And it’s breaking out to new all-time highs.  Just last week, FDN eclipsed the previous all-time high water mark from July 7th, 2011 of $38.25 as well as the 52-week high of $38.01.


As you can see, FDN has been in a solid uptrend over the last year.  But it has failed to clear $38 on the two previous attempts.

The announcement of QE3 came at the perfect time to propel this ETF through technical resistance.  And I believe it sets the stage for a massive run on internet stocks.

In fact, since FDN is now at an all-time high, there’s very little overhead resistance from previous highs.  And that’s great news for FDN.

Trade Alert

Buy:  First Trust Dow Jones Internet Index Fund (FDN) up to $39.50
Recent Price:  $38.41
Price Target:  $51.00
Stop Loss:  $34.00

Remember:  FDN is riding high after the QE3 announcement.  But it could weaken a bit in the short term.  Traders looking to generate a bigger return could wait for a pullback to the uptrend around $36.  However, keep in mind, FDN just broke out to a new high so it could continue to run without looking back.  Those of you who choose to wait could be left out of the trade altogether.  Either way, I see big upside in FDN in the weeks and months ahead.


Consumer Discretionary (+4.6%)

Retail sales rose again last month as higher gasoline prices forced consumers to spend more at the gas pump.  But core retail sales actually fell 0.1% in August.  Not exactly a ringing endorsement of a healthy retail environment.

But the Fed played their trump card with the announcement of QE3 last week.  This is clearly a game changer and a bullish catalyst for consumer discretionary stocks.

Our SPDR S&P Retail Fund (XRT) jumped out to a new peak gain of 7.5% after QE3 was announced.  The surge sent XRT past our $62.50 buy up to price.  So, I’m moving XRT to a hold.

The SPDR S&P Homebuilder ETF (XHB) continues to bulldoze its way higher.  XHB reached a high of $26.10 last week.  That’s good enough for a peak gain of 21.8%. QE3 is a huge positive for the housing market.  And our ETF is quickly closing in on our $28 price target.  Continue holding XHB for more upside.

Consumer Staples (-0.3%)

Consumer staples stocks lagged behind consumer discretionary stocks as investors begin to take on additional risk.  At this point, the defensive dividend trade has become overcrowded.  And we’ll likely see this sector underperform as long as we don’t get any shocks to the system.

Energy (+5.5%)

Energy stocks surged higher in the wake of QE3.

The price for a barrel of WTIC oil peaked above $100 per barrel on Friday.  It was the first time in four months that WTIC has risen above the century mark.

Our SPDR S&P Oil & Gas Equipment & Services ETF (XES) we recommended last month is off to spectacular start.  XES shot past our $36 buy up to price, continue holding for further gains ahead.

Our First Trust ISE Revere Natural Gas Index Fund (FCG) reached a new high as QE3 sent money flooding into stocks and commodities.  Our peak gain is now over 20%. But I still see plenty of upside. Continue holding FCG for bigger gains.

The ALPS Alerian MLP ETF (AMLP) has settled into a range between $16.15 and $16.55.  But that’s just fine.  AMLP gives us a strong dividend play with growth potential from the build-out of the US energy infrastructure to boot.  Continue holding AMLP for further gains.

Financials (+7.6%)

Financial stocks are clearly benefiting from QE3.  They notched a 7.6% gain over the last month.  But I’m in no rush to jump on this bandwagon.  Banks are battling a very difficult regulatory environment.  It makes it difficult for them to generate the types of profits investors came to expect during the expansion of the credit bubble.  In fact, we’ll likely never see financial sector profits regain their former glory.

Put simply, there are too many other good investments to bother with financials.

Healthcare (+3.1%)

Healthcare stocks surged an additional 3% higher last month.  The sector now stands at an all-time high.  And it appears to be poised for further gains.

In fact, the only thing holding back healthcare is if Mitt Romney becomes the next POTUS.  And his chances are fading faster than he can say 47% at a fundraiser.

Our PowerShares S&P SmallCap HealthCare Portfolio (PSCH) surged to a high of $38.14 last week.  That’s good enough for a 12.9% gain. Continue holding PSCH.  Our price target is $40.

The iShare Dow Jones U.S. Pharmaceuticals Index Fund (IHE) has come roaring back after a slow start.  IHE currently trades just a hair below our $90 buy up to price.  Those of you who waited for a pullback to around $86 before you bought are already sitting on some sizeable gains.  And there’s still plenty of upside for big pharma stocks.  Grab your shares of IHE up to $90.

Industrials (+1.6%)

Industrial stocks haven’t gotten as big of a boost from QE as other cyclical sectors. The sector is clearly lagging behind.  But it still managed to ratchet up 1.6% over the last month.

Industrials are suffering from slowing economic growth and slowing government spending.  However, the sector could heat up in a hurry if QE3 sparks economic growth.

Our Market Vectors Agribusiness ETF (MOO) hit a high of $53.19 last week, a gain of more than 8%.  Obviously, QE3 should benefit agricultural asset prices like farm land, grains, and even livestock.  That should lead to a boost in agribusiness spending down the road. Keep an eye on our $56 price target.

Technology (+2.7%)

Tech stocks have benefited from QE3 to the tune of a 2.7% increase over the last month.  And it could be just the thing to spark the next big wave of internet profits. We’re recommending the First Trust Dow Jones Internet Index Fund (FDN) this month… see trade alert for more details.

Our iShares S&P NA Technology-Software Index Fund (IGV) has fully recovered back to the highs it reached in April.  We’re now up more than 14% on the trade.  And after IGV clears resistance at this resistance level, it should be off to the races. Continue holding IGV.

Materials (+5.8%)

Materials stocks hit the bottom right on cue.  And QE3 has sparked hopes for asset price inflation that will fuel bigger revenue and profits for the companies that develop them.

Our iShares Dow Jones US Basic Materials Sector Index Fund (IYM) has shot up 7% to a high of $71.77.  It’s well beyond our $70 buy up to price.  So, I’m moving IYM to hold.

Utilities (-1.5%)

As expected, utility stocks have taken a step back after QE3.  These defensive stalwarts just don’t live up to investors’ growth expectations when the Fed is priming the economic pump.

What’s more, they got a little pricey as investors searched for yield in dividend paying stocks during the summer.  But their day will come again… just not while ‘Uncle’ Ben Bernanke is writing a $40 billion check each month to juice the economy.

Portfolio Changes

  • This month we’re buying FDN.
  • Move SPDR S&P Retail (XRT) to hold.
  • Move iShares Basic Materials (IYM) to hold.
  • Move SPDR Oil & Gas Equipment & Services (XES) to hold.


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