Why You Should Avoid MLP ETFs Until the "Froth" Subsides

Wall Street is going crazy for MLPs these days!  The safe, stable, dividend yield of a master limited partnership (MLP) is all the rage right now with investors.  Which is precisely the reason you might want to steer clear of this sector for a bit.

Tom Dyson elaborates in his Daily Wealth column:

Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea... and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they're about to enter a severe correction.

So what's the hottest new ETF sector right now? It's master limited partnerships...

A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status... including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.

You can read Tom's full piece here.

If the stock market tanks again - as we're anticipating here - then MLPs might be a great place to look for stable, 10%+ dividend yields.  But at just 6%, I agree with Tom that you're probably best served until some of the current froth is blown off.

More on ETF launches as contrarian indicators:

• Time to Short Brazil? New ETF Dedicated to Brazilian Midcaps
• COPX Launches - an ETF focused on copper miners

Ed. Note: This article was originally published in our sister publication, The Contrary Investing Report.

Jim Grant's Early Dollar Requiem; Bob Prechter on Munis; Dollar Turns Up

On December 5th, I bookmarked Jim Grant's Op Ed for the Wall Street Journal entitled Requiem for the Dollar. I had meant to blog about it, but got busy, and it actually worked out for the best, as we now have 15 days of trading hindsight since the op ed was published.

I should first do the obligatory expression about how I think the world of Jim Grant (I actually do). He's a great investment mind, and a truly eloquent writer. But this is a good lesson on why you should always read the financial news with a skeptical eye, no matter how convincing the argument for one scenario or another will be.

As you can tell by the title of Grant's piece, he's not enthralled with the buck's prospects, and kicks off the article with some ominous lyrics:

After a glorious run,

Has the greenback become

The General Motors of currencies,

Hobbled by bad management?

I personally agree with all of the points Grant makes...save for perhaps the timing of his call.

Ironically, while Grant and fellow WSJ readers were mourning the passing of the dollar, the buck itself was kicking off a megarally:

Somebody forgot to read Grant's article to the US dollar.

(Source: Barchart.com)

Of course, no market goes up or down in a straight line. But perhaps, for the time being, the dollar may already have all the "bad news" priced in.

Another great example of why it's so dangerous to use the news to trade - the news usually lags the price action!

Related reading:

• Tom Dyson also believes the worst cased scenarios are already priced into the market for the dollar.
• In the news/trading action sequence spirit, Vadim Pokhlebkin explores whether or not earnings really drive stock prices.

Stephen Colbert's Investment Portfolio Recommendations

Earlier in the week, the Colbert Report did a fantastic spoof on gold. If you haven't caught it yet, check it out...it's absolutely hysterical!

http://commoditybullmarket.blogspot.com/2009/12/whats-in-stephen-colberts-investment.html

America's Top VC - Uncle Sam?

Come one, come all - entrepreneurs and investors alike - and pitch your business to Uncle Sam, the newest kid on the Venture Capital block!

Please exercise caution when reading this piece, as any free market loving individual may throw up all over himself or herself!

Robert Prechter: Run, Do Not Walk, From Munis

Bob Prechter's latest Elliott Wave Theorist popped into my Inbox Friday afternoon. It's excellent as always, and the good folks at EWI were kind enough to allow us to reprint a portion of Bob's analysis, which you can read here.

Prechter advises readers to run, not walk, from muni bonds...as he thinks local and state governments are toast!

One More Good Jim Rogers Interview

Here's another gem of an interview from Jim Rogers on the Closing Bell with Maria Bartiromo:

http://www.youtube.com/watch?v=4HkbS4aDCU0

Hat tip to The Daily Crux for the tip on this interview. And enjoy the hilarious Tiger Woods quip!

Positions Update - Holding S&P Puts, Waiting for Long Dollar Re-Entry

On Thursday, I took advantage of the market dip to close out both S&P shorts. They had to be closed out or rolled anyway. Both positions were closed at a loss, but I was fortunate to get a down day to sell on.

Still looking for a re-entry point into the dollar trade, which I basically got "margined" out of. I would have preferred to hold the position, rather than time the exit and re-entry, as I believe the trend has now changed (finally).

And I'm still holding the S&P 1050 puts, which continue to shed value. But, I think the risk/reward of holding them here is quite favorable still.

Another strong week for the dollar!

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Holding 2 January 10 S&P 1050 Puts.

Current Account Value: $19,235.14

Cashed out: $20,000.00
Total value: $39,235.14
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

Positions Update - Still Really Short the S&P, Long the Dollar

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Why the Worst Case Conclusions are Already "Priced Into" the Market

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

So enjoy Tom's bet with his boss (who's another great investor BTW). And if you're interested in subscribing to Tom Dyson's premium service, The 12% Letter, we've arranged for readers here to receive a 6-Month Risk-Free Trial (click here to learn more).

***

Porter Stansberry Is My Patsy
By Tom Dyson

On Friday, I made a bet with my boss...

Porter Stansberry is my boss and a good friend. He's one of my favorite investment analysts in the world. An investor who is not reading his monthly newsletter is flying blind in a rainstorm.

But I have a disagreement with him right now. Porter says the United States government is broke. He says there's no way it'll be able to borrow enough money over the next 12 months to cover its obligations. There's going to be an enormous government cash crunch unless it "prints" the money.

By printing this money, the government is forcing our foreign creditors to make an impossible choice: Stay with the dollar and see 50% or more of your intrinsic value wiped out... or abandon the dollar completely and risk a global crisis.

Whatever happens, Porter says, gold soars hundreds of percent, the dollar spirals toward zero, and the price of government debt erodes.

Last week, I bet Porter he's wrong.

Specifically, I bet him the interest rate on the 10-year Treasury note would be below 4% at this time next year. The interest rate on the 10-year Treasury note is the price the United States government must pay to borrow money over 10 years. If the market thinks the government is broke and can't afford its debt, this interest rate will rise. Porter bet it'll rise above 4% in the next 12 months. I bet it will not.

Look at this chart of the dollar in terms of the Swiss franc. The Swiss franc is the most stable paper currency in the world. As you can see, the dollar has been falling against the Swiss franc for more than 40 years. That's Porter's big trend... and it's down.

But notice the long periods where the dollar rises... despite the big trend. There was a huge bull market from 1979 to 1985, for example, and another one from 1995 to 2001.

That's the thing about markets. They never move in straight lines. They overshoot in one direction and then overshoot on the way back. And the funny thing is, just at the moment when they are most stretched in one direction, investors feel the strongest desire to join the crowd.

Take 1979 as an example. It seemed as if the dollar was about to plummet. There were incredibly compelling arguments for selling the dollar and buying hard assets... as there are today. It just wasn't a good time for selling the dollar.

I actually agree with Porter's conclusions. I just think much of the worst-case conclusions have been "priced into" the market. The financial headlines are full of stories about gold and the dollar... billionaire John Paulson buying gold... the great money manager David Einhorn buying gold... India buying gold... Chinese housewives buying gold... Warren Buffett protecting himself against inflation.

It's a popular thing to do nowadays... nothing like in the early stages of the gold bull market in 2002.

The dollar's already been in a bear market for almost 10 years, and Porter's theory has as much traction as it did in 1979. It's an incredibly compelling argument... but my gut tells me if you bet on inflation now, you're walking into an ambush.

Now just isn't the right time to be placing bets on the end of the dollar. It's the easy trade that feels right. Any great trader will tell you the "hard trade" is always the right trade.

Unless you're a short-term trader or you still don't own any gold bullion, I recommend you avoid making any new investments based on inflation or the dollar's destruction. You'll make far more money on this sort of investment when the dollar is nearing the end of a multiyear bull market... like it was in 2000.

Again... this is a matter of timing. I'm still a gold bull. I still think people should keep 5%-10% of their assets in gold, for wealth insurance... for a way to own "real money."

But I'm making the "hard bet" that interest rates will not soar in the next year. I'm making the hard bet that the dollar with strengthen. And I'm not afraid to hold cash. It's going to grow in value over the next year. And I'm going to enjoy collecting more of it from my patsy, Porter Stansberry.

Ed. Note: Tom Dyson is the author of The 12% Letter, one of my top 5 favorite investment newsletters. To sign up for a risk-free trial, click here.

Echoes of 1930 - Do Depressions Rhyme?

Mark Twain famously said "History doesn't repeat itself, but it does rhyme."

Several weeks ago I observed that we appeared to be exactly on the pace with 1930. From the stock markets furious rally, to the Fed generating inflation fears, to the self-congratulatory economic comments of leaders proclaiming "the worst is over"...it all seemed to be lining up eerily.

Today Tom Dyson wrote a great piece for DailyWealth, musing about a newspaper he just picked up from September 1930. Tom writes:

This morning, I scanned a list of Wall Street Journal headlines from September 1930...

"We have passed the low point of the depression," says R. Proctor, President of the New England Council, on September 13, 1930.

"Over 75% of brokerage houses now recommend buying stocks," says a headline from September 14, 1930. "Brokers, businessmen and even the general public are more optimistic."

Another story from the same edition reports some retailers have been "caught unawares" by an improvement in business since Labor Day. Some shoppers have had "difficulty finding goods," added the writer.

That damn history - why does it always have to ruin all the fun?

You can check out Tom's full piece here - He also writes an excellent premium newsletter called The 12% Letter, which I read regularly and enjoy very much.

When Will Debt Deflation Turn Into Hyperinflation?

We know that, right now, we are most likely in a period of "debt deflation." Wages are falling. Prices also appear to be falling - though this is open for debate, as there are smart people who believe prices are steady or even rising. For example, Marc Faber recently said he's surprised that prices are not falling faster during this downturn, which may be an ominous sign for inflation.

But for the sake of argument, let's say that at this moment in time, we are experiencing debt deflation. When, then, will the printing of money create price inflation? Tomorrow? Next month? Next year?

I read a great explanation today in Agora's 5 Minute Forecast, where they quote guru Rob Parenteau:

When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation -- or hyperinflation -- begins?

The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.

So while the current deflationary environment exists, what do we do with our money? Here's a guest article from Mr. Deflation himself, Robert Prechter, who shares 10 Things You Should and Should Not Do During Deflation.

And if you're looking for more ideas, Tom Dyson has a few as well. Tom writes the 12% Letter, an excellent publication that digs out high income ideas. Yesterday in DailyWealth, Tom had this to say about deflation:

Airline fares are also down. I just bought a nonstop ticket from Florida to Las Vegas for $120 on Southwest. This peak summer-season ticket probably would have cost twice that much last year.

Local retailers are offering big discounts, too. Last weekend, I saw three retailers advertising liquidation sales with entire store discounts of at least 50%.

Even Internet retailers are using heavy discounts. I bought some bicycle equipment online last week. I got a 40% discount on the retail price... then another 20% discount as part of a Fourth of July sale.

The Federal Reserve may be inflating our currency, but when it comes to the prices of the goods and services I use, I only see deflation.

Cheap credit is the cause. Credit's been too cheap – on and off – for the last three decades. Cheap credit caused savers to spend more than normal and entrepreneurs and businesses to borrow and build more than normal. It led to overinvestment in production and service capacity.

Last year, we reached the peak of the credit and price boom... and now prices are falling. We're in what economists call a "debt deflation."

To read Tom's full article, click here - and I'd also recommend you check out the 12% Letter if you enjoy his insights.

Richard Russell on the Disappearing Dividends

Nice scoop by the Daily Crux - Richard Russell's comments about current dividend levels...or lack thereof!

The second quarter of 2009 was a dismal one for corporate dividends. Standard & Poor's recorded an all-time low of 233 dividend increases plus resumptions and extras. During the April through June period, the 7,000 publicly-owned companies that S&P follows, were down 45.8% in dividend increases from a year ago.

Russell has been around the block more than a few times, and is as sharp as they come. Heed his message loud and clear - talk of green shoots is cheap, show us the money!

At historic stock market bottoms, dividend levels typically average around 6%. That's why it's called a bottom...tough to go wrong investing when yields are that high.

Where are yields now? A paltry 3% last time I saw. We'd need to see the S&P around 450 to see dividend levels where they should be at market bottom!

And if you're not buying a stock for the dividend, that means by default you're buying it in hopes of a rising mulitple. Well multiples are quite high across the board right now, and earnings continue to evaporate right before our eyes...so I would take a long, hard look at every stock you own that doesn't yield some serious dough.

Looking for quality, high-yielding stocks? Tom Dyson is your man - check out his 12% Letter here. And Tom knows how to go long AND short...crucial in today's nutty environment.

Something Cooking in the Lumber Market?

Our friend Tom Dyson over at DailyWealth says that something may be happening in the world of lumber, according to one of his industry sources...Tom writes:

I have an "on the ground" contact who's seeing something else altogether... Don runs a large lumber supply depot outside Orlando. Last week, he sent me a "special commodity alert."

"Over the last 30 days," he wrote, "there have been significant increases in the lumber and plywood markets."

Pine 2x10s have increased 22% in the last 30 days.
Treated pine 2x6s have increased 29%.
Pine 2x6 borates are up 31%.
Spruce 2x4s are up 37%.
Spruce 2x6s are up 44%.
15/32 Oriented Strand boards are up 7%.
15/32 Plywood is up 12%.

It looks like there's something stirring in the lumber market. It could be a local aberration in Orlando... or it could be something bigger. I'm not sure, and neither is Don.

Let's keep an eye on the Chicago futures price to see if it confirms Don's view. In the meantime, I'll hunt for more clues from lumberyards in other parts of the country...

Lumber prices are low, low, low - this is definitely something worth keeping an eye on.

PS - If you like Tom's stuff as much as I do, you may want to check out his outstanding newsletter The 12% Letter, which I read religiously myself.

Platinum's Quiet Rally

Platinum is staging a steady and impressive rally off its December 2008 lows.  After dropping below 800, July Platinum futures hit as high as 1220 today, eventually settling at 1195 for the day.

Platinum is mostly used in industry, but is also considered "hard money", and maybe the 3rd most obvious hard money alternative to fiat currencies - behind gold and silver.  Platinum should do quite well as this newly printed money makes its way into circulation.

Tom Dyson from GrowthStock Wire also likes Platinum a lot, saying "you're nuts if you ignore platinum."

Is It (Finally) Time to Short US Treasuries - And Make a Fortune?

Do we finally have the opportunity that many of us have been waiting for...the mouth watering chance to short US treasuries?

First, a quick review of the fundamental facts, which we have discussed at length in this space.

On October 19, we outlined 7 Reasons to Short US Treasuries - and then we promptly went short long-dated US Treasury Bonds - both via the futures markets, and via ETF's.

Then on November 12th, we were pleased to read a separate analysis about shorting treasuries from Market Folly, one of our favorite sources of financial information, that came to the same conclusion - namely that interest rates are going to the moon.

Everything looked good, and even our buddy Jim Rogers was on the same side of the trade. We were so excited, we shorted a second contract quickly, dreaming of pyramiding our way into riches.

But a funny thing happened on the way to the penthouse - the financial world as we know it temporarily ended, and US Treasuries soared to all-time highs!

So what happened to our master plan? We had to cover our short position - before we ended up in the outhouse - and even Jim Rogers had to cover his!

All because a historic flight to safety sent the world heading for the cozy confines of US Treasury Bonds!

A big hat tip to Tom Dyson at DailyWealth, who made a very prescient call on November 24th that it could take some time for Treasury bonds to actually fall.

So what now? Today I took a quick peek at the 10-Year Treasury Note chart, and was delighted to see - dare I say it - a potential peak forming?

Is this the beginning of a historic collapse - and shorting opportunity? Or will the flight to safety continue into the 1st half of 2009 - propelling Treasuries to even greater heights!

Has anything changed in this short case fundamentally, since our original thesis was formed? Well, let's see:

• The US Federal Reserve started printing money as fast as it can - can you spot the trend in this chart?
• And we've been bailing out every incompetent US company, to the tune of $8.5 Trillion!
  

I'd say our thesis for skyrocketing interest rates is still intact!

Of course, the market is always the final arbiter of who's right and who's wrong. So, we wait. For 10-year chart to break one way or the other - thus we're not short - just yet!

Editor's Note: You can also read and discuss this article on Seeking Alpha.

The Fed Is - Finally - Starting to Create Money From Thin Air

According to Tom Dyson, the Federal Reserve has finally started to create money out of thin air.

Then, last week, it took a "quantum leap," according to George Goncalves, the chief Treasury and agency strategist at Morgan Stanley.

Instead of swapping assets in the banking system, the Fed started buying them. The Fed bought $5 billion of Freddie Mac, Fannie Mae, and Federal Home Loan Bank corporate debt. The New York Fed's website says the purchases are being "financed through the creation of additional bank reserves." The Fed has finally started to create money out of thin air.

In other words, to pay for its purchases, the Fed opened new bank accounts for its commercial bank customers, struck a couple of computer keys, and filled the accounts with money. The Fed hopes the banks lend this money out. If they do, it will add credit to the marketplace... That's inflation.

4 Reasons Treasuries May Not Fall...Yet

Tom Dyson, who also believes in the short case for long-dated US treasuries, writes in today's DailyWealth that it may be some time before treasuries actually start to fall.

But he closes the article by mentioning that the danger is much greater on the long side of this trade - and mentions a great recent quote on the topic by legendary investor Rick Rule:

"Money will be attracted to the liquidity and transparency of the U.S. long Treasury market. I think this will be the final bubble of my generation. Crowding into a 20-year bond in a depreciating currency when inflation sets in, and long rates inevitably rise, will be a religious experience for the victims, in my opinion."