Best Investments for the Second Half

08/02/2011 9:25 am EST


Don Kaufman

Co-Founder, TheoTrade

Thinkorswim’s Don Kaufman discusses the US debt-ceiling debate, commodities, and other crucial investing themes, as well as where the most compelling investments may be found in the second half of 2011.

Don Kaufman is my guest. Don, lots of activity all over the world, but what’s going on right now, and what’s working right now in the US markets?

Alright, the US markets, well, there’s a lot going on. There’s no question about that. What’s working? Well, we’ve seen a more recent downtrend obviously in the marketplace. Volatility in the marketplace is starting to pick up here, and there’s some really heavy trading in bonds right now as the United States has a debt ceiling that has been reached, and of course, we’re going to see if that’s going to be raised up here in coming weeks and months.

What’s the market pricing in on that?

It’s interesting, the market is pricing in an absolute non-event, meaning that if they really felt that there was a threat of default—I mean the entire marketplace—if they feel that the US would actually default on some of their debt in any way, shape, or form, you’re going to see interest rates explode.

I mean, you take a look over at Europe right now, things like Greece, you’ve got interest rates absolutely exploding there. Nobody wants to hold their paper, or their debt.

Ultimately, what that’s also causing is a flight to quality here in the United States. So, you look at this on kind of a global level. Even if the US were to default, we still have more safety and more sanctity than ultimately a lot of the rest of the world.

How should we position ourselves into the second half of this year?

Well, one idea that I’ve had for quite a while is that sooner or later, our interest rates are going up. So that’s something that I think everybody should be taking a look at.

Bonds appear to be in a large, cyclical bubble, and we’ve seen bubbles bursting all over the place, but bond prices are sky high, which obviously drives interest rates down.

Sooner or later, those interest rates are going to pick up. It’s an interesting position to be in. With interest rates going up, you’ll typically see an S&P 500 appreciating in a rising-interest-rate environment.

Although we’ve seen a recent downtrend, in a little bit longer time horizon, you almost have to like the S&P 500. 

I mean, sooner or later, does the economy pick up? The answer is, “Well, sure.”  Where are the people going to put their money right now?  If you’re going to put your money in bonds, it’s kind of dismal. It might be safe, but it’s kind of dismal. Not a lot of returns there. 

So, there’s a lot of cash still not being put to work that we could see fluxing into things like the S&P 500.

How about the precious metals? Some people are pricing in Armageddon and exiting stocks, bonds, and the dollar, and rushing to hard things like gold. What’s your take on that?

So, you know the gold trade, the silver trade, I mean, come on, the silver trade has just been the talk of the town here the last couple of months, and that trade has completely died out. But ultimately, these commodity markets are not huge marketplaces, meaning the market cap—how much capital is actually tied up in them—is not massive. 

A lot of the trade that you see in those commodities is directly related to the US dollar. So, that’s kind of what you want to keep your eye on there.

For instance, if you looked at a barrel of oil today, and a barrel of oil was trading for $100, if the dollar were ultimately to get literally get cut in half tomorrow, the barrel of oil jumps to $200, because again, that barrel of oil is priced in US dollars. 

Now by no means am I saying, “Oh, the dollar is going to go down,” it’s just that the oil trade is very much dependent upon what the dollar is doing. The same thing is true in gold and in silver. 

So they can price in Armageddon all they want, but if the dollar were to gain strength, gold is going down. Oil is probably also going to depreciate with the dollar strengthening. 

And it’s important to know those relationships.

Absolutely, and a lot of traders, they don’t think that far. Again, it’s not about “Do I think this market is going up or down?” but “What about the relationship between this market and the US dollar?” and vice versa.

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