SET Portfolio Update August 2011

August 2, 2011

Dear Sector ETF Trader Reader,

Disgusting…

It’s the only word to describe the debt ceiling debate in Washington.  I don’t think I’ve ever been this frustrated with politicians… And that’s saying something!

These windbags make an awful lot of poor decisions.  They irritate me to no end… But the debt ceiling debate has taken things to an entirely new level of incompetence.

And here’s the worst part…

The debt ceiling debate was nothing more than a political sideshow.  A compromise was always going to happen.  All this did was distract everyone from the real issue… the economy.

The truth is the business cycle doesn’t stop moving for ugly politics.  And right now there’s a cyclical downturn in economic growth.

In other words, economic growth has changed directions.  Economic growth was accelerating in the second half of last year and early part of this year.  But it’s not anymore.  In fact, now it’s slowing.

As a result, we’re seeing many disturbing developments.  And it’s hurting consumers in a number of ways.

For instance, unemployment is going up, job growth is slowing, consumer confidence is down, personal incomes are flat, and spending is contracting.  Ouch!

What’s more, businesses are feeling the pinch as well.  Just look at the July ISM manufacturing index.  It fell from 55.3 in June to a stunningly low 50.9.  That’s the worst reading in the last two years.

The index measures the health of the US manufacturing sector.  A reading above 50 indicates expansion.  If it gets much worse, we’re heading for an outright slowdown in economic growth.  And they’ve got a word for that… Recession!

So that’s where we’re at right now.  Economic growth is slowing on a global scale.  And that means the economy is vulnerable to shocks.

You see, when economic growth is accelerating the economy is basically bullet proof.  If some crisis arises or a natural disaster strikes the economy easily shakes it off and continues to grow.

But when economic growth is slowing it’s vulnerable to shocks.  The same shock the economy can shake off when growth was accelerating could easily send the fragile economy spiraling into recession.

And that’s the key… Right now risk is high.  If we get a shock to the system, we could easily plunge into a new recession.

Despite the economy’s precarious position, politicians seem oblivious to the fact they’re risking a downgrade of US debt.  And a downgrade of US debt could be the shock to send our economy careening off a cliff into another recession!

It’s just plain stupid to play politics with a non-issue like raising the debt ceiling.  There’s just no good that can come from it.

At this point, I think the smart move is to stay invested in defensive and income generating ETFs with a solid dividend yield.  These ETFs should hold up better than more cyclical ETFs as growth slows (or turns negative).

However, there’s a silver lining.

Right now, there’s no evidence we’re going into recession.  And if we don’t get a shock to the system, we could see economic growth accelerate again without dipping into a recession.  That’s really the best we can hope for.

Now it’s all about watching for the first sign of accelerating economic growth.  These leading indicators will give us the first clue that it’s time to get bullish with cyclical investments that outperform when economic growth is accelerating.

Until then, we’ll play it safe…

Position Updates

. . . . SPDR S&P Retail Fund (XRT) – Buy up to $57

XRT’s one of our latest picks.  Retailers continue to prosper despite the economic headwinds.  And it should continue to be a bright spot for the economy.  June retail sales were strong and mall traffic increased in July.  Go ahead and buy XRT up to $57 if you haven’t already.

. . . . Market Vectors Rare Earth/Strategic Metals (REMX) – Buy up to $26

REMX is our other pick from last month.  The rare earth element ETF surged more than 8% since we recommended it.  But it’s given back some of those gains recently.  The bottom line is investing in REEs is going to be volatile.  All of the companies are young and many are still in development.  But there’s no denying demand for REEs will continue growing. The companies who can develop the resources to supply them will make a killing.  Go ahead and buy REMX up to $26.

. . . . Utilities Select Sector SPDR (XLU) – Buy up to $34

XLU is stable.  And that’s really all we’re looking for from our utilities ETF.  This defensive sector will kick in a solid 3.9% dividend yield while we wait for the markets to settle down. Go ahead and buy XLU up to $34.

. . . . SPDR S&P Biotech ETF (XBI) – Buy up to $75

XBI made a strong move to the upside last month.  But our biotech ETF failed to reach a new 52-week high.  Then news from Washington put the entire healthcare sector under pressure.  You see, politicians couldn’t agree on how to cut spending in order to pass the debt ceiling increase.  So they threw a caveat into the budget.  If they can’t agree on how to cut another $1.2 trillion in spending in the next year, then Medicare benefits (along with everything else) could be cut.  Investors clearly didn’t like it.  But I think the reaction is off base.  The majority of the spending cuts don’t come into play for a few more years!  Go ahead and buy XBI up to $75 if you haven’t already.

. . . . PowerShares S&P SmallCap Healthcare (PSCH) – Buy up to $35

PSCH is caught up in the potential Medicare spending cuts too.  I think the selloff has been overdone.  The reality is healthcare reforms will increase the number of people who have private health insurance.  That means more potential customers for healthcare companies.  And the more people who are buying your products the more money you can make.  I think the recent weakness is a great buying opportunity.  Go ahead and buy PSCH up to $35 if you haven’t already.

. . . . iShares Dow Jones US Healthcare Providers ETF (IHF) – Hold

IHF is in the same boat with our other healthcare ETFs.  Clearly, healthcare stocks got hammered by the debt ceiling deal Congress struck this week.  The good news is there’s no guarantee spending cuts will impact Medicare.  However, the possibility that Medicare will lose some funding increases uncertainty.  And we all know investors hate uncertainty… I think the markets overreacted and IHF will bounce back quickly.  Continue holding IHF…

. . . . Consumer Staples Select Sector SPDR Fund (XLP) – Buy up to $31.50

XLP is holding up well in this ugly market.  The bottom line is the consumer is the strongest part of the economy right now.  And this sector should continue to be a bright spot in the weeks ahead.  Not to mention, XLP pays a solid dividend with a yield close to 3%.  Go ahead and buy XLP up to $31.50 if you haven’t already.

. . . . Market Vectors Gold Miners (GDX) – Buy up to $58

GDX is another bright spot in an otherwise ugly market.  However, gold mining stocks continue to lag behind the physical metal.  I expect the miners to outperform the metal at some point in the near future.  GDX is flirting with our $58 buy up to price.  Go ahead and buy GDX under $58 if you haven’t already.

. . . . iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) – Hold

REZ continues to hit one new high after another.  Our residential REIT ETF hit a peak gain of more than 18% on July 22nd.  I don’t see these impressive gains stopping anytime soon.  The bottom line is more people than ever will be renting in the aftermath of the housing market meltdown/foreclosure debacle.  And rents are already rising steadily in most major markets.  Continue holding REZ for bigger gains ahead.

. . . . Market Vectors Agribusiness (MOO) – Hold

MOO is holding up well.  It’s carved out a solid base between $50 and $56 over the past few months.  I think this is the groundwork for another push higher in the second half of the year.  The fundamentals for Agribusiness stocks remain very bullish.  Continue holding MOO for bigger gains ahead.

Action To Take

• None at this time…

 

Category: SET Portfolio Updates