ETFs for Playing Off Inflation & Geopolitical Uncertainty

Friday March 30, 2007
By Mike Paulenoff MPTrader.com

Right now I've tried to position myself in several ETFs that reflect my perception of the world right now. And my perception is that the Fed is in a tricky spot. It can't raise rates, but inflation is really a little bit too high and resistant to their prior 17 rate hikes. So I think that rates are going to climb on the long end of the yield curve, and that's a reflection of the Fed not being able to raise rates and inflation still a factor. On the other hand, the economy, I think, is slowing, and there are several problems in housing and mortgages and credit markets that suggest there are problems there that slow the economy and slow the consumer.

So, I'm positioned to take advantage of that by being long the iShares Lehman 1-3 Year Treasury Bond (SHY). In addition to that, because I think inflation is somewhat stubborn, I'm long the streetTRACKS Gold Shares (GLD). I'm also in that because of geopolitical issues, believing it's probably best to have some sort of safety factor in gold.

In addition, I'm in the PowerShares DB Commodity Index Tracking Fund (DBC), which I think has a chart pattern that reflects the stubbornness of inflation and also the demand for industrial and precious commodities. One other is the iShares Dow Jones U.S. Real Estate ETF (IYR), which is the real estate ETF, which I think is building a major multi-month top. This is also interesting because housing has had a problem and I think it wouldn't surprise people that commercial real estate maybe will have a period of depreciation for a while.

I am also short the iShares Transportation (IYT) ETF . This short position adds another level of hedge to my portfolio in case of a breakout of hostilities this weekend in the Persian Gulf.

As for equity market ETFs, one right now that looks very good among some not so bullish charts is Internet HLDRs (HHH). That ETF is composed of Yahoo, eBay, and Amazon, among others. There are all sorts of the rumors that eBay will be bought by Microsoft. Without the rumors, though, the Yahoo and eBay charts within the HHH itself look pretty good. But you have to be careful, because you can't just say technology looks good. For instance, with the Telecom HLDRs (TTH), to say that looks good is an understatement in that over the last year it's gone from 28 to 38. The question is: Does it still look good? It looked great, but my sense is that we're almost in the past tense in the telecom area in that now you need to be taking your profits rather than saying wow that's a home run, especially as it's up 35% in the last 12 months.

Mike Paulenoff is author of the MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.

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