The Real Reason Basic Materials ETFs Are
Moving Lower
The Dynamic Wealth Report
January 29, 2010
by Corey Williams, Editor
The market’s been moving like Reggie Bush running for a
touchdown against the Arizona Cardinals (man that loss hurt). News
headlines seeking to assign blame for the market’s recent pullback have
focused on Washington DC.
You’ve probably seen it. I’m talking about a Republican Senator from
Massachusetts taking the seat formerly held by Democrat Edward Kennedy
for 46 years. Then there were questions surrounding Ben Bernanke’s
reappointment as Fed chairman. And to top it off, Obama came out and
blasted the ‘too-big-to-fail’ banks.
These headlines seem unsettling. But they’re not the real reason the
markets are heading lower. There’s a simpler reason. Just look at the
sector leading the markets since the March bottom. It took a one-two
punch to the chin.
The Basic Materials Industry is being pushed lower by China and the US
Dollar.
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You see, basic materials stocks have been the bellwether for the global
economic recovery. And that recovery is being led by China.
Remember, it took China’s targeted stimulus efforts to start driving
demand while the rest of the world was still gripped with fear. The plan
worked and last quarter China’s growth was over 10%.
Now China’s Communist government has begun to restrict credit. They’re
tightening lending standards and raising reserve requirements. That
means less money is available to Chinese companies to keep their economy
growing.
At the same time, the US Dollar has reversed its ten-month slide.
As long-time readers know, commodities like basic materials have an
inverse relationship with the US Dollar. As the US Dollar gets stronger,
commodities traded in US Dollars become more expensive to foreign
buyers.
Here’s the deal with the US Dollar. Back in March of 2009, money flowing
out of risky investments piled into cash. It drove the US Dollar up to
highs it hadn’t seen since 2006. Then as fear began to subside, money
began to flow out of the US Dollar and into riskier investments.
But now investors are focused on problems in other countries. Just look
at Greece. They are part of the European Union and the fear is Greece
may default on their sovereign debt. That’s bad news for the Euro.
Basically, investors realized the US Dollar is better off than the Euro. That triggered a reversal in money flow back into the US Dollar.
It’s looking like the beginning of a new rally for the US Dollar. I
wouldn’t be surprised to see the rally last most of 2010.
So with China dialing back spending and the US Dollar poised for a
rally… obviously basic materials are going to head lower, right? Think
again.
Now is a great time to buy basic materials ETFs. As Chinese demand fades,
US demand is just getting ready to fire up.
Here’s why. US Government Stimulus… you remember that $787 billion
dollar stimulus plan, right? (Who could forget it!)
Only $257 billion, or 33%, of the funds authorized have actually been paid
out. That’s government efficiency at its best! So far it’s mostly
transfer payments... stuff like additional unemployment benefits and aid
for schools.
The money spent so far has focused on cushioning the fall. The money
designated for infrastructure projects and other economy stimulating
purposes hasn’t been deployed yet.
But that’s about to change. The majority of the stimulus package, $530
billion, is set to be distributed in 2010 and ‘11. As these funds make
their way to the private sector, demand for basic materials is going to
skyrocket.
Now is the time to take advantage of other investors’ fears. The two
basic materials ETFs I like are the Materials Select Sector SPDR Fund
(XLB) and SPDR S&P Metals and Mining Fund (XME).
• Netflix (NFLX) was upgraded by four analysts
yesterday. FBR Capital now has an outperform rating on the stock. The
stock is up 24% since it reported earnings and rumors of a possible
acquisition by Amazon.com.
• Verizon (VZ) was downgraded to hold by Argus. The
communications company recently reported Q4 profits were down as AT&T
(T) continued to leverage the Apple (AAPL) iPhone to add new customers.
• Davenport started coverage on Dr Pepper Snapple (DPS)
this week with a buy rating. The beverage maker will broadcast its first
ever Super Bowl commercial this year.
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