More inflation Talk

Good article in Seeking Alpha today  if you're interested in adjusting your portfolio for inflation (and it seems like traders have done exactly this all month long):

With inflation worries starting to surface and the US Dollar resuming its fall, many investment advisors have advocated the iShares Barclays TIPS Bond Fund (TIP). This ETF invests in Treasury Inflation Protected Securities, treasury bonds which promise to completely protect against inflation by calculating the coupon payment on inflation-adjusted principal.

The TIP is a smartly designed fund with an attractive expense ratio and plenty of liquidity. But it has one fatal flaw: TIPs haven't been tested in truly inflationary times, and are thus a much riskier investment than most people think.

The protective value of TIPs rests on an accurate calculation of inflation. Critics have long accused the CPI of underestimating the true value of inflation. Much like the unemployment figures, the CPI numbers have beenopenly massaged over time to look more benign. They aren't falsified per se, the index's parameters are simply changed in a way that produces overly conservative figures.

TIPs were first issued in 1997, smack in the middle of the "great moderation". They weren't tested in the 1970's. We don't know if the US government will pay them back honestly and in full. It may simply be easier and cheaper to lower the CPI numbers, leaving TIPs holders exposed. This excellent Bloomberg story describes how poorly TIPs performed in early 2008, right when pre-crisis inflation hit its peak.

The pressure on the US government to fiddle the inflation numbers will be overwhelming the next time inflation rears its head. The Fed wants to keep rates low to support growth. The Treasury wants to keep rates low to avoid raising its borrowing costs, both through higher interest payments and higher TIPs payouts. Every government in the world fudges their inflation numbers, and history has shown that the worst fudging comes in times of the worst inflation. With the US fiscal situation looking more and more dire, investors cannot rely on the flawed CPI to protect them.

Better, safer alternatives exist. The SPDR DB International Government Inflation-Protected Bond Fund (WIP) invests in inflation protected securities from a variety of non-US issuers. WIPs holdings are better credit risks, and their geographic diversity minimizes the chance that any one particular government will hurt your returns.

The ProShares Ultra Short 20+ Year Treasury (TBT) shorts the long end of the US treasury curve . Unlike the CPI rate, long term treasury rates are set by the market. (Although the federal reserve has recently tried to artificially support prices with quantitative easing, its policy has clearly failed.) As inflationary expectations rise investors will demand more yield for long term treasuries, causing prices to fall and TBT to rise.

Investors with more risk tolerance may want to invest directly in commodities, which are usually big winners in inflationary environments. Top picks would include the SPDR Gold Shares Trust (GLD), the Powershares DB Commodity Index (DBC), and the Powershares DB Agriculture (DBA). If you absolutely must invest in TIP, make it a small part of an inflation proof portfolio that includes exposure to international government bonds and commodities.

Disclosure: Author owns TBT.

Good opportunities

We always tell new traders that trading is harder than it looks, but what you always need, whether you are new at the game or a grizzled veteran, are opportunities.   And providing trading opportunities is what  HCPG is all about:

Here are some of the triggers just from the last two days:

SOHU buy 60 worked great:

As did SNDA 56 alert:

Our two previous buy points in RGLD:

In PCU yesterday on the break of the triangle:

Two buy points this month in NEM

Trend line break yesterday in MEE at 22

Our GDX buy point earlier this month on the break of the base:

BIDU 255 yesterday buy point:

AEM two buy points this month:

And we put this freebie in the newsletter last night pointing out the bottoming action -- great follow through today:

TBT holders don't be piggish

A month ago we wrote a post called "Commodity Rip" and discussed how commodity stocks were showing clear leadership. We highlighted XME at 34 (now 37 ), OIH at 94 (now 104 ), USO under 30 (now 35 ), and made a note on the weakness of treasuries with TLT at 97 (now 91 ). It's been one hell of a move.

The trend in the commodity stocks is still intact, but TBT holders might want to take some off the table as treasuries look like they've put in at least a short-term bottom.

Dealing with a psycho market

Accept the fact that we're range-bound and until SPY breaks 88 on the down-side or breaks through the 200 SMA and resistance (93-94) on the up-side there will be a lot of backing and filling.    

So what to do:

If you're a swing trader then buy the dips, sell the resistance in order to avoid being whip-sawed around and forget about break-out trading until the range is broken down/up.

And if you're a day-trader like us then it's business as usual (we got some decent day-trade

 moves on AAPL, VMW, CLF today from last night's newsletter).       

So stop whining, man-up, and be patient until we move out of this channel. 

Dip Buyers Win Again

Just when things could have gotten exciting on a break of SPY 88 -- dip buyers stepped in and thus far have won the day.     

 

  We wrote in our newsletter this weekend: 

"Strategy for strong market: If we break minor resistance 90 convincingly we'll try some longs.  Strategy for weak market:  through 88 and we could be in for a trip to the 50 sma and we'll be looking short."