3 ETFs for a Long Vacation

08/26/2011 12:46 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Instead of fishing for a bottom and possibly letting market panic toss you overboard, Jim Farrish of SectorExchange.com thinks you might do as well by sitting back with these three bond ETFs.

Jim, we’ve got some volatile times. What strategies are you recommending?

We do have some volatile times. It has really started to get very interesting in this marketplace.

You know, we’ve been talking about this for almost five months, since February as the economy started changing, it creates volatility. It’s gotten bigger and bigger while we’ve introduced some real volatility, very reminiscent of 2008. I don’t think we’re anywhere near that type of crisis but I think we have some serious volatility for markets.

So, I think you’ve got to step back as an investor and really evaluate. Do you want to deal with fundamentals? Do you want to deal with technical analysis? Are you a trader, an investor? You’ve got to take inventory, so to speak, and figure out who you are.

Well right now, fear seems to be driving everything, not technicals nor fundamentals. What’s going on?

Fear is one of those—you know the acronym has always been thrown around, since I was little, that "false education appearing real."
So, we’ve been falsely educated in this country that:

  • Our debt would always be AAA-rated. We found out that’s not true.
  • We’ve been educated in this country that all recessions will come back and have a positive economic environment behind them. We’ve learned that if the stimulus isn’t right, it isn’t true.

So the fear is going to drive the market short-term. My opinion? Take some money out of your account, put everything in a money market, get in your car and go on a vacation. Because in a couple of weeks, a couple of months, it’s going to be okay.

Things will come back to normal. We’ll see parity in the markets, things will correct. But trying to trade or get into sight of this market in this current environment is just a fool’s game.

The downgrade of our US government debt didn’t affect the Treasury market at all. It has just slammed the stock market. Why?

Well because you know the real crux of that matter is there is nothing wrong with our debt. We can pay the interest, and I think people are starting to understand that.

The second part of it is, why is it impacting the stock market? It’s not the downgrade on the Treasury. It’s the economic data.

ISM manufacturing data has gone from 59.9 down to 51.3. We saw ISM services data go from 3 consecutive months to the downside. We see all of these erosions in the economic fundamentals. They’ve been happening for three months.

Now because we go from 1,360 on the S&P down to 1,100 overnight, all of a sudden it’s the downgrade of the debt’s fault. It’s the economics. We have unemployment. We go through all the numbers, and they’re just not good.

Well the unemployment picture, it’s kind of a vicious circle. Companies aren’t going to hire unless there is demand. Folks aren’t going to buy unless they have a job. What’s going to give?

Regulation. You’ve got to give. We’re over-regulating the banks. We see what the ramification of Dodd-Frank is.

I’m not saying we don’t need regulation. We need to rein it in. Corporations need to know what is on the horizon.

Can I hire people and know that I’m not going to get hit for a higher Social Security tax? Can I hire people and not get hit for higher health-care tax? Can I hire people…I mean, you start thinking about it.

I’m a business owner. I think about it. I haven’t hired anyone since all of this started. Why? I don’t know what my liability is to health care. I don’t know what my liability is going to be to Medicare, Social Security—go through the entitlements and they’re there and they’re real.

And I’m a small business owner. Think about GE, what the liability is to them. That’s why you’re seeing companies not hire. They’re afraid to hire. It’s not that they don’t want to.

If we had a payroll tax holiday and then a tax holiday for corporations that would allow them to hire, do you think that might goose the economy?

Fool’s game.

No?

You know, let’s go back to Ronald Reagan. I know a lot of people talked about him, but in 1986, Ronald Reagan talked about how to stimulate the economy.

What did he do? Innovation. We’d pump money into technology. We gave tax breaks to small businesses for creating new innovation, new businesses, new jobs. We’re not doing it.

Natural gas—Boone Pickens has been running around this country saying we need natural gas. He hasn’t done it.

Where is the innovation? Where is the money? We spent $1 trillion on what I call entitlement subsidies that have done nothing to create jobs.

I’d rather take the $1 trillion, and let’s educate America. Let’s take the people that want to be educated in this country and let’s retool their thinking. Take the autoworkers, take the people who have been laid off, take the people who have lost their overseas jobs. Let’s innovate, create new technology, new ways to do things in this country, and we’ll be back on our feet.

Well, you started out telling me to cash everything in and take a vacation. When should I come back from my vacation?

When the bottom is in.

When might that be? How will I know?

How will you know? I think one is technically you look at the charts and you start to see a base being built. We aren’t at the bottom.

Markets don’t bottom like a knife. They take time. So, look for it over the next couple of weeks and months. Does it start to build a base? If it does, things start to smooth out a little bit, then I start tiptoeing back into the market.

But those are just stocks. Bonds are still out there. High-yield bonds are a great opportunity. iShares iBoxx $ High Yield Corporate Bond Fund (HYG)…I’d be looking at things like that and iShares S&P National Municipal Bond Fund (MUB).

Look at the things that offer you opportunity. iShares JPMorgan Emerging Markets Bond Fund (EMB) which is another, an emerging-market bond fund.

Look at what’s going on in the bond market, but don’t forget you can invest in currency. You can short the dollar, go long the euro. You can go long just about anything you want in ETFs today. So, there are a lot of opportunities. Don’t get fixated on what’s going on in the US stock market. Look for where the opportunities reside.

And Jim, for the record, do you own those recommendations?

We don’t own any of those positions right now, but like you said, we’re on vacation. We looking for the opportunities so they’re on our watch list, and there are things that you can see.

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