2013: A Look Back And Ahead
A fully diversified investment portfolio includes a mix of
stocks, bonds and so-called alternative assets, which are
basically anything that isn't a stock or a bond. This includes
hard assets like real estate, commodities and obscure things like
Three investment strategists believe alternative assets offer
the best upside potential in 2013. They explain which
they're buying for their clients and why.
David Schombert, founder and chief investment officer
at Metropolitan Capital Strategies in Reston, Va., with $90
million in assets under management.
MCS believes the U.S. stock market is at an inflection point
with a 10% chance of going up to 1550 (on the S&P 500), a 20%
chance of going sideways and a 70% chance of dropping between 25%
and 50%. Prices in the market throughout 2012 appear to have been
driven primarily by perceived news events: U.S. Federal Reserve
stimulus efforts, Europe, China and the fiscal cliff.
At some point stock prices will again be determined primarily
by fundamentals rather than news events; and when that happens,
the deterioration of earnings and revenue in 2012 will become a
significant weight on the markets.
In its December meeting, the Fed increased its support for the
economy and the stock market in hopes of accelerating growth and
maintaining or increasing market values. It is now forecast to
pump $1 trillion into the market in 2013 based on current
activity (on top of the $2 trillion+ it already pumped in).
MCS believes this money printing by the U.S., and coordinated
with other central banks around the world, could lead to
inflation and weakening of the U.S. currency. Inflation would
show up in the cost of goods people purchase every day such as
food and oil. Inflation will then force interest rates to rise on
bonds. The 10-year Treasury bond (yield) is at a historic low,
under 2%. An increase to its mean of 4% would double yields,
causing bond prices to drop.
As this scenario unfolds, MCS will capitalize on the
opportunity by using the inverse bond ETFs such as
ProShares UltraShort 20+
Year Treasury (
ProShares UltraPro Short 20+
Year Treasury (
). As prices bounce around during the correction, we could use
this play two, three or more times while the bonds plunge in
The MCS philosophy and approach is to identify opportunities
with double-digit upside (potential) and low risk. When the bond
play unfolds, it will meet both of our objectives. While it could
occur in 2013, we are not prognosticators. We will be patient and
work with what the market gives us, knowing that protecting
assets and making appreciation in low-risk time frames leads to
better returns for investors. Protection and growth are
Mark Eicker, chief investment officer at Sterling
Global Strategies in Carlsbad, Calif., with $140 million in
A major investment shift has begun. The effects of the 2008
financial crisis profoundly impacted investors' willingness to
risk capital as they put trillions of dollars into fixed-income
instruments. As the money poured into bonds over the past four
years, yields were driven down to record lows. That trend has
begun to reverse as the yield on the 10-year Treasury has bounced
back from an all-time low of 1.39% to above 1.8% since September.
The Aggregate Bond Index is poised to post its first negative
quarter since first quarter 2011. That money will continue to
flow out of low-yielding bonds and into more traditional balanced
asset allocations during the first quarter of 2013.
Our ETF pick for the first quarter of 2013 in the fixed-income
space is the
ProShares Short 20+
Year Treasury (
). TBF theoretically rises along with interest rates, which is an
inverse relationship that Treasuries have with rising rates. The
duration of this ETF is more than 18 (years), which means a 1%
move up or down in 20-Year Treasury yields would impact this ETF
by approximately 18% in either direction. An inverse Treasury ETF
is not for the faint of heart and should never be a large piece
of an investment portfolio, but I do believe this will be the
best performing fixed-income ETF during first quarter 2013.
Brian Schreiner, vice president of Schreiner Capital
Management in Exton, Pa., with $65 million in assets.
The most attractive area in 2013 is volatility investing. In
fact, we are treating it as a new asset class. When you
understand that market volatility has more impact on portfolios
than any other single factor, it certainly makes sense to manage
it. That's what diversification is all about. Investing in
volatility takes diversification to another level.
There is no shortage of opportunities to profit from
volatility because, well, volatility is volatile. The key is
being able to capture its trends and anticipate the spikes. The
VIX is not something you want to buy and hold. Volatility has its
own unique characteristics and must be actively traded.
Our portfolios utilize an active long/short approach that
achieves inverse volatility exposure by owningVelocityShares
Daily Inverse VIX Short-Term ETN (
) when markets are calm and long exposure in
iPath S&P 500
VIX Short-Term Futures ETN (
) when market volatility is high.
Volatility trends. When volatility is low, it tends to remain
low and when it's high, it tends to remain high. As volatility
traders, the goal is to be short volatility during the melt-up
and be in cash or long volatility during stock market
corrections, when volatility is high.
The upside in volatility trading is huge. Investors can
realize triple-digit returns as VXX and XIV tend to be about
three times as volatile as the S&P 500 Index. Until recently,
the VIX has been trending below its long-term average of 20.
Increased volatility may continue as uncertainty around the
fiscal cliff negotiations continue to keep markets in flux.
Looking ahead to 2013, further quantitative easing will likely
provide continued support to the stock market, keeping volatility
below historical norms and opening the door for substantial
profits for investors in XIV.
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