They Just Don't Get the Fed

No one gets the Fed. Everyone is confused. Everyone is upset. And NO ONE gets it.

Not too long ago the Federal Reserve, which is NOT the government by the way, announced that they are embarking on a cruise, the QE2. Ok, ok, it's not really a cruise line, it's an abbreviation for Quantitative Easing, Round 2. It means that the Federal Reserve, a private corporation, is going to buy US Treasuries...and we at MOFinancial say THANK THE HEAVENS.

Lets give you a little background on the situation. For more, you can check out our older post entitled "Bail on your Bonds". Inflation is coming...seriously, it's coming. Look at food and energy prices and you'll see that inflation is upon us. You know what loves inflation? Stocks. Do you know what hates inflation? Bonds.

It's a simple: When interest rates go up (they're at zero now...sooooo, you tell me a situation in which the next rate hike isn't up), then bond prices go down. Bonds always trade with market interest rates (outside of the inefficiencies that exist in the markets temporarily). When a bond doesn't have a market interest rate, the price will decline until it reaches a market interest rate. So, as the Feds eventually raise rates to head inflation off at the gap...bonds are going to get WHACKED!

Now, here is the genius of the Fed. What's the one way NOT to lose money on bonds? That's right, hold them until maturity. Given the average age of a bond buyer (somewhere in the 50s or 60s) because of the asset class being viewed as "safe" and "conservative" , it is unlikely that these investors will even LIVE to maturity...let alone hold the asset until maturity (if they're holding 30 year bonds). When they pass away, the funds will be liquidated by eager beneficiaries who will realize what should be massive losses at that point thanks to a higher federal funds rate & inflation (which will destroy the principle value of those bonds).

Another problem? Do you really think investors will hold treasuries of the 10 & 30 year variety when they start going down as rates go up? Heck no! No bond fund manager is going to stand around and watch their fund price get hit week after week...they'll lose their jobs. Thanks to an inflow of $16 Billion Dollars last year, those guys have a lot of firepower these days to do massive damage by hitting the sell button. It'll be like yelling fire in a crowded movie theatre & watching everyone hit the door at the same time. When individual investors see what the institutional seller is doing to the price...they'll jump in and hit the panic button along with them.

What is the solution? Just take a quick look at QE2. Ben has $600 Billion in firepower to go out and buy treasuries that are floating around out there. That is enough to buy up every penny of the $16 Billion that flowed into the individual investor held Mutual Funds last year PLUS some. This gives individual investors a "buyer of last resort" to offload their treasury holdings so that they can swap into smarter investments like clean corporate debt, high yield bond ETFs, Emerging Market Sovereign Debt, REITs, and high yielding equities. All of which are better choices right now than the long end of the treasury curve...heck, better than the short end because of low yields. Because the Federal Reserve is an institution and not an individual, they can afford to hold the bonds to maturity without giving a darn about the principle since they'll collect that bond interest the entire time & will be made whole at maturity. Heck, they may even take the interest & go buy some real assets like corporate debt (which would be a terrific idea when bonds get hit as they raise the fed funds rate).

So to all you holders of Treasuries out there...individuals, PIMCO, China, everyone...go sell your US Government to the Fed because Ben is buying. You can thank him later for saving your rear end, and your retirement savings. We'll probably get some inflation out of all this...which means Ben will make your 401(k), IRA, and even your house go up in value...not a bad days work for a guy who no one but Jim Cramer seems to understand. We're with you Jim, Ben may just be the man of the Century after being Time's Man of the Year. So to Ben & the Fed leaving on the QE2...BON VOYAGE from Magnum Opus Financial!

Minerals, Miners, and More OH MY!

Gold has been hot, real hot, and no one even uses it. Gold, unlike other metals, doesn't really have a use. People make jewelry out of it, but that's really it. We know that the base metals like iron, steel, copper, and zinc have heavy industrial uses in all sorts of things from infrastructure, transportation, and appliances. But even the other precious metals like platinum and palladium have uses.

Platinum is used in laboratory equipment, electrical contacts, electrodes, resistance thermometers, dentistry equipment, and even catalytic converters.

Palladium is used in computers, mobile phones, multi-layer ceramic capacitors, component plating, low voltage electrical contacts, SED/OLED/LCD televisions; and in destry, medicine, hydrogen purification, chemical applications, and groundwater treatment. That's a heck of a lot more than you can say for gold. Because pure gold is chemically unreactive, it's uses are limited. It does resist oxidative corrosion, but that's about it.

Now that you know about the metals, how do you play them?

As the platinum and palladium ETFs become available, we like North American Palladium, symbol PAL, and Stillwater Mining, symbol SWC. Think about the GLD, the gold ETF that tracks the price of gold. It has become the 6th largest holder of gold in the world! That’s more than Japan, more than China, More than the ECB, more than Russia, more than the UK, more than Venezuela. Ok, you get it, it’s holding a TON of gold. With the creation of the platinum and palladium it’s hard to imagine that those ETFs will not become large holders of those metals just as the GLD has done for gold.

Because platinum and palladium actually have uses in the real world, beyond jewelry, investor demand for these metals could push their prices up significantly. In order to play that, we are long SWC and PAL. Take a look. You can obviously wait for the ETFs to be issued, and trade on the US exchange, but we are going to play them directly through the miners as the miners are levered to the price of the metal and you’ll see them go down more on a decline and up more on a price gain.

For industrial metals we own Alcoa (AA), US Steel (X), and Nucor (NUE). You can play copper aluminum and zinc without stock by using the Powershares Base Metals ETF (DBB). We'll have a link to Powershares up soon on the MOF Home Page under Investor Tools on the Investor Education Section. You can get gold and silver from PowerShares in the DBP. They also have a miners ETF with PSAU.

Finally, for an individual Gold Miner, we do like BVN. The closer you get it to $30-$32 we think the better. It does have a small dividend, but their cash flow is great, nearly half a billion dollars and about 3 times as much cash on hand as they do debt on the balance sheet. That's always a great sign for us. Forward P/E is only a 13.94 so valuations are not stretched, although the current P/E is a 25. So, look for a pullback, or buy just a little here and build your position on pullbacks. You can own the equipment company Bucyrus International (BUCY) And don't forget about BHP Billiton Limited (BHP), probably the best Miner in the world.

Don't forget to leave comments on this and other posts and check out what's on the YouTube channel by clicking a video on the right!