It was a strong week for U.S. stock markets, as the Dow Jones rose 2.15% and S&P 500 jumped 1.94%. Global markets rebounded even more strongly, with the MCSI Emerging Markets Index ending the week 4.26% higher.
The big news of the week was that on Thursday, the Fed announced that it will buy $40 billion a month in mortgage-backed bonds for as long as it deems necessary. The Fed also extended its commitment to near-zero interest rates into mid-2015 from late 2014.
That sent your interest rate sensitive bets soaring — including Standard Pacific Corp. (SPF) and American Capital Agency Corp. (AGNC), which jumped 8.75% and 4.2%, respectively. On Friday, you already booked a 76.47% profits in your AGNC options. And today, I am recommending that you sell half of your SPF December $7.00 call options to lock in your 61.54% gains. Hold on to the stock and potentially bigger gains ahead. Raise your stop to $6.70.
Your “option-style” bets on European banks also continued their remarkable run, with the National Bank of Greece (NBG) soaring 28.79% and Bank of Ireland (IRE) jumping 8.48%. As you know, these are volatile positions you should treat more like options than stocks.
In my view, QE3 has all sorts of distorting effects on the U.S. economy — summarized well in an op-ed piece in the Wall Street Journal co-authored by Michael Boskin and John Taylor, both former professors of mine at Stanford. As they point out, 75 cents every single dollar of the Federal deficit this past year was financed by the Federal Reserve. That’s scary stuff.
My task at Bull Market Alert is to react to changing investment circumstances, a recommend how you can profit from it.
Your already have two bets — SPF and AGNC — in your Bull Market Alert portfolio that will profit directly — and handsomely — from the Fed’s zero interest rate policy.
This week I add a third. With the Fed’s balance sheet exploding, inflationary expectations are soaring. And despite the underlying rate of inflation staying tame, QE3 will make it harder for Fed policymakers to contain inflation down the road.
And one of the best places to make money as the Fed unleashes a tsunami of liquidity is in commodities, specifically through the PowerShares DB Commodity Index Tracking Fund (DBC).
After all, commodities are the asset class investors run to when start to worry about inflation.
DBC is a broad-based bet on commodities and is comprised of futures contracts for 14 different commodities. DBC provides exposure to aluminum 4.2%, Brent crude 12.4%, copper 4.2%, corn 5.6%, gold 8.0%, heating oil 12.4%, light crude 12.4%, natural gas 5.5%, RBOB gasoline 12.4%, silver 2.0%, soybeans 5.6%, sugar 5.6%, wheat 5.6% and zinc 4.2%.
DBC has already had quite a run recently, rising over 20% since it bottomed on June 11th. And many hedge funds that I know have profited handsomely form this upward move. Yet, with the Fed’s wall of liquidity hitting the markets, I think there is plenty of short term upside left.
So buy PowerShares DB Commodity Index Tracking Fund (DBC) at market today, and place your stop at $28.20.
For potentially even bigger upside, I recommend the January $30 calls (DBC130119C00030000).
Disclosure: I hold DBC as part of my “Ivy Plus Investment Program” on behalf of my clients at my firm Global Guru Capital.
Portfolio Update
Bank of Ireland (IRE) jumped 8.48% last week. IRE continued its sharp rebound as hopes for a European recovery continued to look positive based. Positive sentiment is reflected in the euro as well, as the currency hit a new four-month high recently. IRE is a BUY.
National Bank of Greece SA (NBG) closed out a second stellar week powering another 28.79% higher in your portfolio. Recovery optimism spilled over into the Greek financial sector last Thursday as Greek finance minister Yannis Stournaras denied Greece would need a third bailout. NBG is a BUY.
Novo Nordisk A/S (NVO) fell 3.98%. NVO pulled back to its 50-day moving average last week as some investors took profits after NVO hit a new 52-week high recently. Holding the 50-day moving average (MA), NVO is a BUY.
3D Systems Corp. (DDD) fell 2.95% over the past five trading days. DDD completed yet another test of its 50-day moving average last week and appears ready to move higher – again. 3D Systems also announced the availability of cases for the new iPhone 5 last week. These cases can be custom printed with varying text using DDD’s Cubify® 3D-printing technology. DDD remains a BUY.
Standard Pacific Corp. (SPF) had a brilliant week, jumping 8.75%. SPF shot up as Moody’s raised its U.S. homebuilder outlook from “Stable” to “Positive”, citing continued low interest rates and affordability, in addition to pent-up demand for new homes. SPF is a BUY. Raise your stop to $6.70.
Ross Stores Inc. (ROST) was flat last week. ROST completed a test of its 50-day MA last week, managing to begin and end the week precisely on the 50MA. Citigroup provided a boost to the entire retail sector last week, opening rating coverage on twelve retailers. Citigroup ranked eight out of the twelve retailers as “Buy”, including ROST. Closing out Friday dead on the 50-day moving average, ROST remains a BUY.
ProShares Ultra Nasdaq Biotechnology (BIB) managed a 0.82% gain. BIB traded sideways last week as the ultra-hot biotechnology sector took a breather. Not to be deterred for long though, BIB managed to hit a new 52-week high in Friday trading. BIB is a BUY.
American Capital Agency Corp. (AGNC) added to its previous week’s gain, moving another 4.20% higher. Given a second chance in your portfolio a few weeks ago, this stock has continued to deliver. AGNC will also pay a dividend of $1.25/share on Sept 19. AGNC is a BUY.
Seadrill Limited (SDRL) tacked on 0.73% last week. SDRL continues to have strong cash flow growth and earnings per share growth metrics, in addition to its large 8% dividend. Add on strong drilling platform “day rates” and platform demand, and SDRL remains a strong BUY.
Michael Kors Holdings Ltd. (KORS) lost 4.35%. Although KORS dipped a bit last week, the past three weeks have really been quite flat overall. In addition to the previous week’s Wedbush Securities rating and price target bump, Citigroup initiated coverage last Thursday, rating KORS a “Buy”. Citigroup also set a monster $65 price target – over 21% above Friday’s close. KORS is a BUY.
CVR Partners LP (UAN) was essentially flat for the week, adding 0.27%. UAN is a leading producer of nitrogen and sells the bulk of their production to fertilizer companies. However, breaking nitrogen down into other components, such as urea ammonium nitrate, provides UAN with an even more profitable secondary product. And, UAN is currently expanding its output capacity for this chemical by 50%. UAN is a BUY.
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