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Investment Strategies to Exploit Current Macroeconomic Trends

Stock-Markets / Emerging Markets Jul 23, 2008 - 12:30 PM GMT

By: Mike_Stathis

Stock-Markets Best Financial Markets Analysis ArticleI have several investment strategies in play to exploit the macroeconomic trends that continue to unfold. Many of these strategies have paid off handsomely – shorting the financials, homebuilders, and mortgage companies – and playing the market trading ranges. While I feel there is still more to be made by shorting the financials, the fact is that shorting strategies are not suitable for many investors. Here, I attempt to provide some more practical guidance for everyday investors. As you will see, I gradually progress into more sophisticated strategies. You need to determine what the best approach is for you based upon your risk tolerance, investment needs and horizon.

Canadian Oil Trusts

For several months now, I've warned investors to stay away from traditional U.S. equities. My May 5, 2008 recommendation to sell the market led to 20% returns in just over two months (“Stay Clear of Traditional U.S. Asset Classes”). Despite my not so optimistic views for the U.S. market (other than for traders), there are a few ideas worth consideration. As you might suspect, I continue my love affair with the oil trusts - specifically the Canadian oil trusts - due to the consistent dividend payout and high dividend yields. You might want to check my previous article “Using Oil to Beat Inflation (Part 1 & 2).” My top picks remain Penn Growth Energy Trust (PGH) and Penn West Energy Trust (PWE) due to dividend consistency, solid management, and of course the longer-term dynamics of global oil supply and demand.

I recently took a position in Harvest Energy (HTE) for a dividend capture strategy, but have since sold it off after collecting the recent $0.30 dividend and some capital appreciation. The long-term chart for HTE is a bit concerning as you might appreciate. It's been gradually trending downward and is currently testing a key support level. If it fails to hold this support it could drop another 15% over the next few weeks. A continued correction in oil increases the chances of a breakdown. While the dividend yield is among the most attractive of all oil trusts at around 18%, (at this time) I plan to only get back in if it drops to the $17-$18 range. But as I have noted previously, proper hedging of oil futures should keep the dividend safe. And if dividends remain consistent, a sell-off could raise the dividend yield to over 20%. Aggressive traders should note that if the stock does not break down, it is likely to surge up to the $21 level in the near-term. Remember, these trusts can experience short-term volatility due not only to oil prices, but also due to lower volumes and the monthly dividends. So they provide the safety of strong dividends and the flexibility of trading opportunities.


Over the past couple of months I have been accumulating Pfizer, and continue to do so during sell-offs. With a dividend yield of 7% (due in part to a 55% decline from its all-time high reached a decade ago), Pfizer stands to benefit big, along with the entire drug industry as Medicare Part D kicks in over the next few years. Forget the news about pipeline issues. This has already been factored into the share price. While waiting for the expected $200 billion in profits to hit this industry each year from Part D alone, you can collect a 7% annual cash dividend, which is likely to head even higher judging by the company's flawless 41-year history of dividend growth. As a bonus, there could even be a pop in share price if management takes my advice by approving a 2 billion share repurchase plan.

After United Health (UNH) experienced some exaggerated sell-offs, I became a buyer. Marked by a very controversial exit package for the former CEO, once totaling $1.6 billion and more recently scarred by a back-dated options settlement of nearly $1 billion, it's time to move forward and with a longer-term position. Despite the downward earnings revisions by the industry in general and UNH in particular, in my opinion it is severely undervalued. I have been waiting a few years for this buying opportunity and because the fundamentals have not changed within the HMO industry or within the company, I feel it represents an excellent buying opportunity.

Valuation Plays

Although the securities I've mentioned in this piece are excellent value plays, I have a couple of others I'd like to mention for more aggressive investors. If you're willing to exchange more risk with significantly higher upside potential, you might want to consider taking positions in Nvidia (NVDA) and Frontier (FTO), as I have. While FTO is more of an intermediate-term position, I am expecting significant upside in NVDA over the next 1 to 2 years.

Emerging Markets

For long-term investors, the real opportunity for capital appreciation lies with China , Brazil and India . While I do not feel comfortable taking positions here, I plan to put most of the cash dedicated to capital appreciation into these markets down the road. In my opinion, ETFs are the safest way to play these markets (FXI, GXC, PGJ/China, EWZ/Brazil, and IFN/India).


So where am I looking to buy these funds? It's too hard to say right now, but I would not be comfortable buying anything in the Shanghai Composite until it drops another 600 points (no ETF listed), sending it to the 2200 range. For the FTSE/Xinhua China 25 Index (FXI), I would like to see it fall to around 90 before taking a position, although it might be a while. Note these indices have already dropped by about 50% this year. Quite simply, based upon the risk to the global economy, I'm not interested in getting into these markets unless I can get them at a good price. If I don't find the price I want for the securities I want, there are plenty of other opportunities down the road. As always, cash is king, and those who have the most when the meltdown occurs will stand to benefit the most.

In contrast, the SPDR S&P China (GXC) fund is looking a bit more attractive for long-term investors, as is the PowerShares Gldn Dragon Halter USX China (PGJ) . There is one caveat I'd like to mention for aggressive short-term traders. After Beijing hosts the Olympic Games in August, it's quite possible that investors will flood into Chinese funds after the nation showcases its remarkable economic growth and progress, so be on the look out for this potential momentum-driven trading event.

While I wait for a further correction in these markets as the U.S. recession extends throughout the globe, I have taken a position in the Greater China Fund (GCH). This is a closed-end investment fund that I've favored for many years. Similar to many closed-end funds, it pays a nice dividend. Typically the fund declares a year-end dividend in November or December, and sometimes a mid-year dividend. Note the massive $13+ cash dividend per share dividend declared last year.

Keep in mind that the Chinese market was up by 100% in 2007 and I would not expect to see such a huge dividend this year. However, the fund recently declared a $6.66 per share dividend (ex-dividend June 26, 2008) payable in stock or a cash dividend payable at discount of 30% of the aggregate amount of the value of the stock dividend (as determined by the NAV or not less than 95% of the closing share price on July 24, 2008). If the fund behaves as it has in the recent past, you should look for investors to gradually start accumulating the fund beginning in August or September, as they anticipate the year-end dividend. You should be able to spot this accumulation period if you pay close attention to the chart.


For Brazil , I would like to see a significant sell-off from current levels. Understand that this index rose by over 900% in the past five years. And while I see nothing but excellent growth from Brazil in the future, the fact is that the global recession will impact this nation perhaps more so than China . As for India , I would like to see the IFN head down to the low 20s before initiating a position. So sit back and relax. I expect the road ahead to be quite bumpy. Remember, we shouldn't expect a bottom in emerging markets before we've seen a bottom in the U.S. economy. The key point to remember is that the rebound in emerging markets promises to have much more upside over the next several years. 

Foreign Currencies

You should also keep your eye on the Renminbi/USD ETN (CNY) . Once China starts to more fully value its currency, I expect this EFT to surge, although that might take another couple of years. I've been a fan of the Yen (FXY) and the Swiss Franc (FXF) for over two years now, and I don't plan on changing course anytime soon. I am especially bullish on the Yen down the road.

Remember – patience and dividends, cash and buying opportunities. Be patient while waiting for buying opportunities which can only be seized by having cash. And throughout this turbulent period marked by underreported inflation and other bogus data coming from Washington , you should look to invest in high dividend yield stocks such as the oil trusts and Pfizer. Note that these are stocks you should be willing to hold for several years because they are certainly not momentum buys, although trading opportunities will surely emerge throughout this period.

By Mike Stathis

Copyright © 2008. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

Restrictions Against Reproduction: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the copyright owner and the Publisher. These articles and commentaries cannot be reposted or used in any publications for which there is any revenue generated directly or indirectly. These articles cannot be used to enhance the viewer appeal of any website, including any ad revenue on the website, other than those sites for which specific written permission has been granted. Any such violations are unlawful and violators will be prosecuted in accordance with these laws.

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Books Published
America's Financial Apocalypse: How to Profit from the Next Great Depression . Condensed Ed. Copyright © 2007.
Cashing in on the Real Estate Bubble . Copyright © 2006.
America's Financial Apocalypse: How to Profit from the Next Great Depression . Copyright © 2006.
The Startup Company Bible for Entrepreneurs: The Complete Guide to Building Successful Companies and Raising Venture Capital . Copyright © 2004 and 2005.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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