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By Keith Fitz-Gerald
Money Morning/The Money Map Report
Many investors are wondering what to do with their cash now – particularly if they're income oriented and bonds are a big part of their investment portfolio.
This is really a two-part question. You want your investments to earn a decent return, but at the same time, set you up for the next interest rate cycle and future profits.
First, get ready to sell your longer-term bonds. Odds are that the bond markets are headed for one final blow-off rally, due to the slowing U.S. economy and the subsequent rate cuts as "Team Bernanke" tries to deal with it. We don't think the U.S. Federal Reserve will do much, nor do we think any action it takes will be enough for much more than a temporary "relief" rally.
In fact, we are so skeptical of Fed Chairman Ben S. Bernanke's "Attention to Deficits Disorder" that we would actually prefer to see a Paul Volcker-style torpedo that cleans the pipes thoroughly – but that's a story for another time.
Second, buy T-bills. Finance this move with any new cash that you had been planning to use for conventional bonds. Central banks around the world are being forced to deal with Bernanke's benign neglect. They're also ditching the dollar, leaving it out on the curb like the trash that it is.
That's a big problem for Washington, which is going to be left holding the bag if it can't sell dollars to such countries as China, Japan and Korea that have traditionally bailed us out by supporting our deficits and our greenback. We think this is going to ultimately force the Fed to reverse course and raise interest rates in an effort to make the dollar attractive enough to bring those countries back to the table and keep ‘em buying.
But that's not going to happen, yet. Look for this to happen on the heels of the rate decrease I just told you about, which puts any future rate hikes in mid-2008 at the earliest.
If you're a little more aggressive, and longer-term in orientation, and do want to buy the bonds anyway, one of our favorite choices is the PIMCO Strategic Global Government Bond Fund (RCS). It's presently got an impressive yield of 7.70% and pays monthly. The trick is that if the dollar gains some footing, it may drag on performance, but with a solid income, we're less concerned about that if the markets drop farther.
Third, work the ladder. When rate increases begin in earnest, begin buying a good old fashioned interest rate ladder, and split your bond investments amongst instruments with two, three, five and 10-year maturities. Research shows that you can capture 80% or more of bond-market returns, using maturities that are 10 years or less without the volatility that plagues longer-term bonds – such as those with 20- and 30-year maturities.
And, fourth, consider currencies. Currencies can be viewed as an investment-allocation just like any other investment class in your portfolio. We don't advocate trading spot-FX though. In contrast to all those slick mailers and infomercials say about how simple these profits are to grab, currency trading is really not easy to do.
Instead, we prefer a specialized choice like the Powershares DB G10 Currency Harvest Fund (DBV). This ETF simultaneously takes long positions in the world's three-strongest currencies and short positions in the world's three-weakest currencies, as measured by interest rates. It's a bit like hitting a tomato with a sledgehammer in that it's a very effective strategy that can be used on something that normally requires a much finer touch.
But when the going gets rough like it has been recently, it's sometimes the simplest things that matter.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.