Many average investors like to think that the performance of the STOCK market is closely tied to the underlying ECONOMY. And in most normal times, that’s true. But the current market environment is anything but normal.

I say that because we’re in the midst of yet another round of money-printing-driven action. The fingerprints are everywhere …

Super-low volume rallies in stocks. Levitation in gold. A slump in the euro first, driven by the European Central Bank’s backdoor money-printing LTRO program, followed by a slump in the dollar, driven by more dovish talk out of the U.S. Federal Reserve.

All these clues tell me that the “asset” economy is floating on a sea of liquidity … for now. Meanwhile, the “real” economy is doing nowhere nearly as good. And that only proves my thesis, once again, that QE is completely ineffective at helping average people on the street find jobs or promoting real, healthy, sustainable economic growth.

But for Wall Street bankers, it means Party Time!

Latest Data Sure Doesn’t
Point to Booming Growth!

Since most of us care more about the real world, I want to start by reviewing the latest data to see what it shows …

* December consumer spending was unchanged, below expectations.

* January consumer confidence, as measured by the Conference Board, slumped to 61.1 from 64.8 a month earlier. That missed expectations.

* January’s Chicago-area manufacturing index fell to 60.2 from 62.2 a month earlier. That missed expectations.

* January’s ADP jobs report showed the addition of 172,000 jobs. That was down significantly from 292,000 in December and below expectations.

* November’s S&P/Case-Shiller figures showed home prices dropping by 3.7 percent year-over-year. That missed expectations.

* December new home sales fell 2.2 percent, while December pending sales of used homes dropped 3.5 percent. Both numbers missed expectations.

Are you seeing a pattern here? Because I sure am!

The markets are floating on a sea of liquidity.

We’re seeing the best start to a year for the stock market since 1997 … despite an economy that’s doing nowhere near as well as the economy did back then.

Why?

The answer is that the Fed, the ECB, the Bank of England, the Bank of Japan, and other central banks are all doing some version of real- or quasi-QE!

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Ride the Wave If You Want …
but Don’t Get Swept Away!

So what’s my advice for this kind of market? What can you do to ride the wave, without getting swept away?

Well, I’ve pared back broad market hedges and focused on a few, select asset classes and companies that can make the most of QE-driven gains … without completely collapsing once the free-money party ends. And that’s working out.

So I suggest you follow the same game plan as long as central bank money printing, rather than underlying economic fundamentals, is driving the bus.

Then a few months or quarters down the road, when investors realize that QE is failing — once again — to spur real economic improvement, I’ll flip right back to the strategy that performed so well last summer. Namely, the use of aggressive downside plays!

If you’re already on board with me, you’ll have access to crucial guidance on when and how to make that switch. But if you haven’t given Safe Money Report a try, then I urge you to consider doing so now.

You can find out more … and get started at a special discounted rate … by clicking here.

Until next time,

Mike

The ETF marketplace changed last month. You didn’t notice? Don’t worry, you’re not alone. Today I’ll tell you all about it.

You already know that “exchange traded funds” trade on an exchange. That’s what distinguishes them from old-fashioned mutual funds. But what exchange trades them, and where is it?

For some new iShares, the answer isn’t New York or Chicago. Their trading hub is Lenexa, Kansas. Let me explain …

Exchange Floors
No Longer Needed

Computers bring order to chaos like this.

For most people, the term “stock exchange” brings to mind images of noisy rooms filled with men in colorful jackets, waving their arms and making cryptic hand motions.

At one time, this is exactly how trading got done — and the apparent chaos was actually very efficient. But now, even the nimblest floor traders can’t compete with the speed and accuracy of modern computers.

An “exchange” isn’t a physical place anymore. It’s a mechanism by which buyers and sellers find each other. Nowadays, it happens in milliseconds.

Not surprisingly, then, there’s no longer a need for traders and exchanges to stay in lower Manhattan. The New York Stock Exchange and Nasdaq don’t get it — yet. They will. Their customers are going BATS.

Kansas: The New ETF Capital

From its headquarters in a Kansas City suburb, BATS Global Markets is now the nation’s third-largest securities exchange. The company launched its first trading system in 2006. Then in 2008, it was acknowledged by the SEC as a “national securities exchange” on par with the NYSE and Nasdaq.

The founders of BATS recognized that stock exchanges are really in the technology business. Trade processing isn’t rocket science, and it doesn’t take financial genius. The keys to success are accuracy, reliability, and low costs.

Locating in Kansas is a great way to keep your expenses down. Everything from office space to taxes is much lower than New York. Over time (and millions of transactions) the difference adds up.

BATS — maybe because it has some distance from the traditional exchange culture — is innovating in other ways, too. The company is planning a “Competitive Liquidity Provider” program that will give market makers a financial incentive to increase liquidity and keep bid/ask spreads tighter.

It’s working: Last year BATS had an 11 percent share of U.S. stock market activity. The firm’s European unit, when combined with another exchange BATS is in the process of acquiring, had a 25 percent market share.

Now BATS is going for the jugular. The upstart wants to lure primary listings away from the big exchanges, starting with ETFs. iShares was the first sponsor to make the leap — but I bet more will follow.

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Why You Should Care!

For small investors, this may seem like “inside baseball.” You may not know or care how it all works. You just want to buy and sell at a fair price. You trust your broker to handle the details.

That’s exactly why you should be glad BATS is on the scene. The competition they’re creating, both for listing fees and trading volume, is what keeps your costs down.

Competition between exchanges saves you money.

So whether you knew it at the time or not, the January 24 launch of iShares MSCI Norway Capped Investable Market Index Fund (ENOR) on BATS was a big deal! ENOR was the first of seven new single-country ETFs from iShares in January. BATS is the primary exchange for all of them. Two more are coming soon.

I don’t know if iShares intends to keep listing new ETFs on BATS. Nevertheless, the vote of confidence from the world’s largest ETF sponsor means something.

Unfortunately, some stock quote services are not yet set up to recognize BATS as the primary (or only) exchange for securities. I expect this to be fixed soon. But in the meantime, you may have a little trouble getting quotes on the BATS-listed ETFs.

Will BATS take over the world? No — there will always be room for competition. But the fact that this firm exists at all is still remarkable.

ETFs were a revolution in themselves. They’ve transformed the entire money management industry. And they are the investments I follow to help my International ETF Trader members profit from ever-changing global market conditions.

Now the revolution is entering a new stage — and you’re set to be one of the winners.

Best wishes,

Ron

It seems that the only thing traders and investors on TV want to do is try to handicap when a bunch of government officials and bureaucrats in Europe will finally make up their minds and solve the crisis still gripping the region.

But while that may be a fun mental exercise, I prefer to use my time looking for good investments to buy. Because when you find a good investment at a compelling valuation, the implications from Europe or any other crisis can be substantially minimized. On top of that, the rewards can be gigantic!

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Take Netflix (NFLX) for example …

NFLX was a darling of Wall Street during much of 2011. That is until the company decided to split its on-line streaming video service and its traditional DVD-by-mail service. In addition, they raised prices on their subscribers.

The customer outrage was incredible, and subscribers cancelled in droves (I was one of them!).

The stock absolutely collapsed, from a high of over $300/share in July, to a low of $62/share in late November, a fall of nearly 80 percent! You would think that given the decline, Netflix was on the brink of going under.

But the company hadn’t lost all of its subscribers. Plus it was trading at a very compelling valuation …

Netflix, at the peak, was trading at 63 times 2011 expected earnings of $4.75/share. At the bottom, it was trading at just 13 times earnings, which was about the same multiple as stodgy, non-growth stocks. At that valuation, there was a valid argument to be made for getting long the shares, even though Wall Street still hated the stock!

Investors who bought in that $60, $70 even $80 dollar range turned out to be right, as shown in the above chart. And last week Netflix’s announcements further confirmed that that had been a smart move …

• The company reported 21.7 million steaming video subscribers, beating expectations,
• The company expects to add between 1.1 million and 1.9 million streaming video subscribers next quarter, besting expectations, and
• The company reported $875 million in revenue for Q4 2011, and over $40 million in net income easily topping Wall Street’s dire expectations.

Buyers who saw the value in this stock have earned a big reward: Shares were up 20 percent in one trading day last week, and hit $125 on Monday, up a jaw-dropping 100 percent from that low in November.

So at this lofty price range, does this mean that Netflix is out of the woods as a business and there’s nothing but higher profits ahead?

Of course not … the valuation is no longer as attractive as it was when shares were at $60.

But the point is that to make money in this market, it’s necessary to look for value in names the Street and the market hate — and try to avoid being obsessed with the latest headlines.

Best wishes,

Tom

Unfortunately, we’re all familiar with the phrase, “too big to fail.”  In fact, we’ve all gotten a wake-up call about the consequences of mostly unregulated interconnectivity and globalization in the financial markets.  It’s not just us anymore.  It’s us and the European Union, Japan, China, South America and on.  And it’s not just the pesky big banks we have to watch, it’s also the global insurance companies.

There are efforts underway to bring standards and monitoring to world financial markets.  And, of course, when there are regulations in the offing, there are those that will look for ways to circumvent them.  So, regulators can’t just make rules for one industry without thinking about the broader effects.   

Click here to read more …

Writing covered calls is a strategy I’ve discussed here before, but I wanted you to know that I am now getting ready to actually start using it for my own dad’s income portfolio.

[Editor's note: This is the same $100,000 account that Nilus shares with his Income Superstars subscribers.]

Why now?

Because, in its essence, covered call writing is a moderately bullish strategy. And in the case of an income portfolio, I actually think it works best if the market remains relatively flat or even pulls back a bit in the short-term.

So, yes, this means I’m less enthusiastic about more short-term market upside than the average analyst is right now.

In addition, options sell for the most money when the markets are volatile — and I think we’re going to see another pickup in wider swings over the next few months.

Remember, When You Write a Covered Call,
You’re Basically Trading Upside for Income

To understand why that is, let’s do a quick recap on the strategy.

Call options are contracts that allow investors to buy a given security at a given price (the “strike”) over a specified timeframe. Each options contract covers 100 shares of the security, known as a “round lot.”

Therefore, when we write a call we’re selling this right to someone else and collecting the premium — the price that the investor is willing to pay for the option — in return.

And the reason this is called covered call writing is because we are writing calls on stocks we own.

Yes, it is entirely possible to create and sell a call for a stock you don’t own, but I DO NOT recommend doing it. Known as “naked” writing, it literally leaves you exposed to lots and lots of risk.

Okay, so let’s say we write a covered call on 100 shares of stock we own.

What next?

As I already mentioned, we will first get the premium paid (minus commissions) deposited into our account. This is ours to keep no matter what.

Then, we wait and see what happens between now and the time the contract expires.

If the stock price fails to rise above the strike price of the contract, the investor who bought our call option will let it expire worthless. We get to keep our stake in the company, any dividends paid, plus the money we collected for the option.

The same is true if the stock goes nowhere or down during the life of the contract. And it’s even true if the stock temporarily goes above the strike price but the investor holding our option fails to exercise it.

Also, once the contract expires we would be free to write a new call with a new strike price and a new timeframe, which means we can continue collecting more and more premiums!

Meanwhile, the last possible scenario is that the stock rises above the strike price and the investor exercises the option before it expires.

In this case, we will be forced to sell our shares to the options holder AT the strike price. Please note that this is our only obligation. We can never be forced to sell the shares at any price other than the strike price!

In other words, the worst thing that can happen with covered call writing is that we will be forced to part with our shares for the predetermined strike price — which means we lose any additional upside from that point on.

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But with covered call writing, we can never suffer any additional downside risk, as long as we pick strike prices that are higher than our entry prices plus commissions!

That makes covered call writing about as foolproof as a strategy can be.

Now, to actually do this in the real world, you first have to get your brokerage account authorized to write options.

Dad and I have already submitted his paperwork to Vanguard, and we should get approval shortly.

The process and time involved might vary a bit based on your broker, but essentially all you should have to do is fill out a form requesting “Level 1 Options” clearance. This allows you to write covered calls, and it is even allowed for IRAs.

A couple final points:

First, I only plan on writing contracts that are “out of the money.” In other words, we’re looking for strike prices that are HIGHER than the underlying stock’s current one — and CERTAINLY higher than the price we paid for the shares (including actual and potential commission costs)!

This is the only way to be sure that we won’t lose money on the covered call strategy.

Second, I will be recommending that dad place limit orders when he writes his covered calls. In other words, I will specify the lowest premium he should be willing to accept for a given contract, and we will use these parameters when submitting orders through Vanguard.

Third, assuming a contract gets written, we will obviously NOT be selling the underlying shares until the contract expires or is exercised.

Based on my preliminary calculations, following these simple rules should help dad earn even more money from his nest egg in the coming year … and I think it’s going to allow us to outperform the market once again in 2012.

I will definitely be sure to keep you posted about how the strategy actually works for us in the real world … and I encourage you to consider this approach for your own portfolio, too.

Best wishes,

Nilus

P.S. I plan on issuing the first covered call recommendations within the next month. So if you aren’t yet a subscriber to my Income Superstars newsletter, now is the perfect time to take a risk-free trial. Joining now will guarantee that you’re on board before we start this new approach … and will ensure that start getting advanced notice on ALL my specific trading ideas going forward.

P.P.S. I don’t think you’ll find another $39-a-year newsletter that has the kind of real-world track record and advanced approaches that Income Superstars offers!

We’ve seen the political and financial elites paint lipstick on a pig before. But never anything like this!

Consider the pig in Washington: Uncle Sam continues to run the worst deficits — and borrow the most money — since America’s war for independence.

And yet Congress has virtually given up on any semblance of a long-term solution.

In any other world or time, Uncle Sam would be paying through the nose to borrow money, driving interest up all over the U.S., and causing havoc in the stock market.

The lipstick: The Federal Reserve continues to paper over the disaster with the wildest money printing of all time … PLUS … the most sustained zero-interest policy in U.S. history.

The result:

•  Conservative savers are being squashed, earning a pittance for their hard-earned funds.

•  Investors are again being herded into highly speculative deals.

•  And nearly the entire American economy is fundamentally destabilized.

Next, take a look at the pig all across America: According to www.shadowstats.com, more than 22% of U.S. workers are now unable to get a regular job — one of the worst unemployment rates in the industrialized world.

The lipstick: In its headline unemployment number — now at 8.5% — the U.S. government conveniently excludes any unemployed worker who has given up looking for work or is forced to accept low-paying, part-time jobs.

Heck, even researchers at the U.S. Bureau of Labor Statistics admit that 8.5% grossly understates the true unemployment in America. So they make a half-hearted attempt to figure out a broader unemployment rate — now at 15.2%.

But they’re STILL sweeping at least half of the dirt under the rug! How? They deliberately avoid counting all those who have given up looking for work after a year’s time — a huge group of discouraged workers who, in the real world outside the Beltway, still want and need a job.

The result: While Washington and Wall Street take credit for an “improving recovery,” the majority of Americans continue to suffer from a Great Recession!

And don’t forget the PIIGS in Europe: Everyone knows that the sovereign debt disasters in Europe have spread to all five of the PIIGS countries — Portugal, Ireland, Italy, Greece, and Spain.

Everyone knows that France, Belgium, and even Germany are also extremely vulnerable.

Plus, nearly everyone — even at the highest echelons of euro officialdom — recognizes that the only solution is going to be many years of austerity, hard work, and saving.

The lipstick: Late last year, the European Central Bank (ECB) began running its own printing presses at breakneck speed to “save” the banks and avert a total collapse.

The folks at the ECB themselves admit that it’s not a solution to the debt crisis, that it’s prone to backfire. Yet they’re doing it anyhow.

The result: The extra cash pouring into the global economy is helping to levitate stock markets to some degree and could continue to do so for a while longer.

But at best, it will backfire in a matter of weeks. And at worst, it will create a new dangerous bubble of mammoth dimensions, this time mostly in government bonds.

Rampant Official Hypocrisy

In the past, the world’s leaders and elites typically had the backing of economists at major universities and governmental organizations:

If Washington, London, Berlin, or Brussels declared the global economy was mending, then it was because they were in synch with mainstream economists.

But now, hypocrisy in high places is so rampant — and so obvious — that even Establishment economists have rebelled.

They don’t buy the official line. They don’t even tone down their language like they used to.

Quite the contrary, they’re now beginning to speak out about precisely the same danger we’ve been warning you about for months: a global recession — or worse!

Here are just a few prime examples …

•  Among mainstream economists, a whopping 93% now predict a major recession all over Europe! And it’s widely recognized that, since the European Union represents the largest economy in the world, any European recession must mean a global recession.

•  Economists at the International Monetary Fund (IMF) warn of a series of financial shocks … fresh market turbulence emanating from the euro area periphery … major credit downgrades … and signs of an economic slowdown.

•  Economists at the Organization for Economic Co-operation and Development say that Europe already appears to be in a recession, stressing how the problem of massive long-term unemployment has become increasingly common.

•  And economists for the World Bank make even more strident warnings. Their own words …

“The financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries …

“Capital flows to developing countries have declined by almost half as compared with last year, Europe appears to have entered recession, and growth in several major developing countries (Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening.”

My view: This statement alone should make investors everywhere stand up and pay attention. But there’s much more …

“Meanwhile,” continue the World Bank economists, “the medium-term challenges represented by high deficits and debts in Japan and the United States … have not been resolved and could trigger sudden adverse shocks.”

My comment: See? Like us, the World Bank is warning that, although the sovereign debt crisis hit Europe first, Europeans are certainly not the only ones who have committed financial sins. If anything, the “sudden adverse shocks” that the World Bank is referring to could easily be larger than the shocks felt so far in Europe.

“Additional risks to the outlook,” they write, “include the possibility that political tensions in the Middle-East and North Africa disrupt oil supply, and the possibility of a hard landing in one or more economically important middle-income countries.”

This is what Weiss resource specialist Sean Brodrick has been warning us about. And the danger is now greater than ever!

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What About the Massive European Money
Printing to Turn This Situation Around?

At best, the folks at the World Bank see the ECB’s efforts as a temporary patch:

“While contained for the moment,” they write, “the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains.

“In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured.

“Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into a recession as large as or even larger than that of 2008/09.”

My Recommendation

First and foremost, don’t be deceived by the abundant lipstick that Washington, Wall Street — and officialdom globally — have painted on pigs all over the world. So don’t be lured into Wall Street’s latest “hot investments.”

Second, restrict your portfolio to investments that are most likely to rise despite bad times.

Third, go one step beyond: Buy some inverse investments that are specifically designed to go up because of bad times. The more the market falls, the more money you stand to make.

Most important, keep a big chunk of your money safe — such as with institutions meriting Weiss Ratings of B+ or better. (To check on your institutions, go to www.weisswatchdog.com.)

The yield you’ll get on truly safe investments is minimal. But for the sake of true safety and peace of mind in today’s crazy world, it’s worth the sacrifice.

Good luck and God bless!

Martin

The problems facing Japan have been building up for some time. And I don’t believe the coming negative impact on its currency can be delayed much longer.

Earlier this week I gave my World Currency Trader members two powerful reasons why. In today’s column, I’d like to share those with you:

Reason #1—
Japan just recorded its first
current account deficit since 1980

As you can see in the chart below, Japan posted a trade deficit of 2.49 trillion yen in 2011, after the economy was hit by the price shock of oil and a slowdown in global growth.

There are two related points to consider here that should lead to a weaker yen:

•  Japanese industry is being hollowed out by the strong yen. The overvaluation of the yen makes Japanese products less competitive on international markets. As a result, many of the country’s powerful manufacturers have moved much of their operations offshore and are threatening to move more.

•  A current account deficit means Japan will be importing capital. This is important as it relates to the second powerful reason below — it means Japan will need to make itself more attractive for international investors, and that usually comes in the form of higher interest rates.

Reason #2—
Japan is quickly losing the ability to
fund its huge debt needs with internal savings

The pool of savings in Japan is falling. The Japanese government will increasingly have to attract international investors to fund its own towering debt needs.

Consequently, interest rates on Japanese bonds will have to rise. And this may further dent growth prospects in Japan relative to the United States; helping make the dollar more attractive than the yen.

Normally, higher rates tend to help a currency. But in Japan it has been quite the opposite for many years. It goes to the artificial nature of the Japanese money market.

Just take a look at the following chart and you can see what I mean. For example, when interest rates on Japanese bonds shot up in mid-2008, the yen took a nosedive. And when interest rates fell in mid-2010, the yen’s value soared.

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10-year Japanese Gov’t Bond Yield
versus Japanese Yen-U.S. dollar

Now take a look at the chart of Japanese yen — U.S. dollar. The pair recently tested near-term support.

CurrencyShares Japanese Yen ETF — FXY Weekly

There is a long way for the yen to fall if I am right about this setup. Members of my World Currency Trader service are positioned for the move; are you? If not, click here, and I’ll show you why you can always count on currencies to present serious profit opportunities.

Best wishes,

Jack

P.S. For daily currency and macro views, be sure to visit my Money and Markets blog — Currency Corner.

Last week, I discussed how the European Central Bank has lost its marbles, launching its own version of quantitative easing. I dubbed it “QE-E.”

I also said that QE accomplishes almost nothing for the “real” economy, even if it juices asset markets. And sure enough, we got more proof of that this week (details to follow!).

Well, this week it was the Federal Reserve’s turn at the podium and what happened? Policymakers didn’t launch an official QE3 program. But they did promise to keep short-term interest rates low through late 2014 … up from a previous pledge of 2013.

Not only that, the Fed also said it would continue with its “Operation Twist” policy of selling shorter-term Treasuries and buying longer-term ones. The goal? Hold down long-term interest rates.

Noted bond fund manager Bill Gross of Pimco dubbed it “QE2.5.” All I could do was shake my head!

What QE Does —
and Doesn’t — Do!

If all this QE talk has you confused, I understand. Wall Street jargon can be a bear to decipher. So let’s just keep things simple and explain what QE is: Money printing by a country’s central bank. And what does that money printing do?

Pumping more cash into the economy soon leads to higher prices for everyday items.

It devalues the currency of the country doing the printing …

It erodes the purchasing power of the country’s citizens …

It inflates the price of commodities, making every gallon of gas you buy and many of the groceries you purchase more expensive …

It drives down the yield on virtually all of your savings vehicles, forcing you to scrounge for pennies in your couch cushions or take on huge risks to generate the same amount of income you made previously …

And it artificially boosts the value of paper assets, including everything from junky bonds to stocks.

In other words, if you’re an average American, you get screwed!

But if you’re a seven-figure-salary investment banker at Goldman Sachs, you hit paydirt. You can peddle more stocks and bonds, make a lot of money doing so, and maybe afford a new Ferrari or house in the Hamptons.

Ain’t life grand?

The fatal flaw of QE, though, at least in terms of its impact on the REAL economy, is those pesky side effects. Sure, QE temporarily juices stock prices. But because it also drives up the cost of living, it drives down the disposable income of everyday citizens. Eventually prices rise so high that no one can afford them, and that’s when the economy collapses.

And even during that “honeymoon” period when stocks rise, QE doesn’t really help the economy …

The latest example came just this week from the U.K. The Bank of England bought 200 billion pounds of assets there as part of its QE1 program a while back. Then it launched a 75 billion pound QE2 program in October.

What happened as a result? The country’s economy shrank a greater-than-expected 0.2 percent in the fourth quarter of 2011. That puts the U.K. on the verge of a double-dip recession. Oops!

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What to Do …

Last week, I talked about the potential for QE-E to prop up the asset markets regardless of the fundamentals. Now we have the Fed piling on with its own version of “QE 2.5.”

Never mind that it won’t work, at least if by “work,” you mean help the real economy. Fed policymakers like Ben Bernanke aren’t going to let the facts get in the way of a good story. They need to look like they’re not just sitting on their hands. So they’re going to keep doing the same wrong things, expecting a different result.

The best way to protect yourself is to own some gold, own select fixed income investments that do NOT pose excessive risk, and own select stocks with solid fundamentals. That’s what I’ve been recommending to my Safe Money subscribers.

They should be in a good position if the weak global economy persists, and they’ll get an extra boost from all the easy money sloshing out there. To see how you can join them and receive specific guidance on “what,” “when,” and “how” to buy, click here.

But if you choose to go it alone, just be sure to keep one eye on the exit doors — because down the road, QE 2.5, QE-E, and all these other harebrained programs will fail just like their predecessors did!

Until next time,

Mike

I’ve spent my investment career following sector momentum, and it’s worked out pretty well. ETFs make it even better.

Right now my indicators show a lot of short-term strength in real estate. Personally, I find it hard to believe the housing market has truly bottomed. My colleague Mike Larson recently gave you some good reasons to doubt the housing rally.

In my experience, trends (either up or down) endure longer than most people think possible. So it makes sense to at least be aware of the alternatives on both sides.

Today I’ll tell you about four paths to the real estate sector with ETFs. I’ll also describe a couple of ways you can make a bearish bet on this group.

Builder, Owner, Lender, or More?

If you’ve ever bought or built a house, you know how much work happens before you even get the keys. The same is true for real estate investors. Through ETFs, you can …

• Build homes
• Own homes
• Lend money for homes, or
• Own a home lender.

Let’s look closer at each category and some example ETFs.

Path #1—
Home Builder ETFs

Building homes sounds easy enough, but in fact it’s intensely competitive.

They want to sell you a house.

That’s doubly true for the big builders that construct entire communities from scratch. They have to plan years in the future and market very aggressively. Moreover, their profits are largely at the mercy of economic forces they can’t control.

Nevertheless, when the stars line up correctly, big homebuilders like Toll Brothers (TOL) and Pulte (PHM) can make a lot of money. Here are some ETFs that give you quick diversification in this group.

• SPDR S&P Homebuilders (XHB)
• iShares Dow Jones U.S. Home Construction (ITB)
• PowerShares Dynamic Building & Construction (PKB)

Path #2—
REIT ETFs for Income and Growth

REIT stands for Real Estate Investment Trust. It’s a special category of securities that represents tradable ownership shares of a real property portfolio.

Just like real estate, REITs are available in all flavors. Some target certain types of property: Commercial, residential, geographic regions, etc. REITs may emphasize current income or seek capital growth.

REIT ETFs own a portfolio of REITs, each of which in turn has a portfolio of properties. Here are a few examples:

• iShares Dow Jones U.S. Real Estate (IYR)
• SPDR Dow Jones International Real Estate (RWX)
• iShares FTSE NAREIT Residential Plus Capped (REZ)

Path #3—
Mortgage Lending ETFs

“We’re looking for a loan.”

Unless you’re one of the lucky few who can buy a home with cash, you’re either renting or you have a mortgage. If you have a mortgage, you borrowed money from someone. Who? Most likely, it was a securitized mortgage lender. These nebulous pools of money own a majority of home mortgages in the U.S.

Here are some ETFs that put you on the other side of the table, making you the lender …

• iShares FTSE NAREIT Mortgage Plus Capped (REM)
• Market Vectors Mortgage REIT Income (MORT)
• iShares Barclays Agency Bond (AGZ)
• Vanguard Mortgage-Backed Securities (VMBS)
• SPDR Barclays Mortgage Backed Bond (MBG)

Path #4—
Equity Stake in a Lender

SPDR S&P Mortgage Finance ETF (KME) is closely related but a step removed from the direct lenders. KME owns common stock of companies involved in mortgage lending. These tend to be the smaller banks as well as peripheral businesses like mortgage insurers.

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Bonus Path—
Betting AGAINST Real Estate
with Inverse ETFs

ETFs can help even if you think the real estate bear isn’t through growling. Inverse ETFs are designed to go up in value as an index goes down.

This is how leverage feels.

Presently U.S. investors can access two such ETFs:

• ProShares UltraShort Real Estate (SRS)
• Direxion Daily Real Estate Bear 3x (DRV)

Note that both of these carry built-in leverage (2x for SRS and 3x for DRV). Because the leverage factor is adjusted daily, they won’t necessarily give you 2x or 3x the amount the underlying index falls for periods longer than one day.

Inverse ETFs are trading vehicles. They’re not designed to buy and hold. Success with them depends heavily on your timing.

There you have it: Four different categories of real estate ETFs and a couple of inverse ETFs as well. Use them cautiously, and good luck!

Best wishes,

Ron

P.S. Real estate is just one of the many sectors I follow in my International ETF Trader service. To learn how you can get clear, concise trading alerts when I spot an important change, click here.

The market has been watching Europe, particularly the fact that (as of this writing) a deal still hasn’t been struck between the Greek government, the Troika (the ECB, IMF, and euro-zone leaders), and private holders of Greek debt (bankers, hedge funds, and sovereign wealth funds).

In order for Greece to avoid a default on €14.4 billion, which comes due on March 20, these groups must agree to reduce the value of Greece’s debt. Basically, they are negotiating to see how much money lenders will lose — in other words, accept a massive “haircut.”

Negotiations have been ongoing for a while, and a deal is expected to be reached. But the original agreement was supposed to have been struck months ago. So it’s interesting to see why this is taking so long.

The reason is because the Troika wants to get Greece’s debt/GDP ratio down to a manageable 120 percent from the current 200 percent. The problem is that every time they look at the Greek economy, they see that it’s slowing.

Consequently they have to re-do the growth forecasts, which then requires more of a haircut on the bonds to reach the 120 percent target debt/GDP ratio.

Think of it this way: Suppose you go to buy a house, and the bank wants to make sure that the mortgage isn’t more than 120 percent of your annual income. Let’s say you make $100k a year. The bank would be willing to loan you up to $120k. But, if your income decreases to $80k, the bank will only loan you $96k.

“It is about avoiding a 1930s moment … a moment, ultimately, leading to a downward spiral that could engulf the entire world.” — Christine Lagarde, chief of the IMF

The point of this is that every time the parties think they have an agreement, the private bondholders are told they need to take a bigger loss. Originally they were told it would be 50 percent, now the figure is 70 – 80 percent, so they’re taking a hard line approach.

In all likelihood, the negotiations will get done and a deal struck. But given the slowing of the Greek economy due to austerity the Greek government will have to impose to receive a bailout, the probability of the deal having to be re-negotiated at some point is high.

Longer-term Problem

Looking further down the road, the question comes up: How are the PIIGS countries supposed to pay back all this bailout money, when they are simultaneously being forced to implement austerity measures that will slow their economies, and in return tax receipts?

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The answer isn’t at all clear. But it is a stark reminder that this whole European crisis is one that will take years to figure out — something to keep in mind the next time we get a furious rally in the European markets, like we’ve seen lately.

Remember that in the short term, the market focuses on the rate of change in a trend, not the direction (i.e. are things getting worse than they were last week), not “are they getting better?” The rate of change in the euro zone is positive, and markets are reacting accordingly, but fixing the problems will take years.

So when the talking heads start saying the situation is fixed, you might consider the ProShares Ultra Short Euro (EUO) and Ultra Short MSCI Europe ETF (EPV).

Both could potentially profit from overly short-term optimistic traders. Just keep in mind, though, that these are leveraged ETFs, and as such are good trading vehicles, but not meant to be buy-and-hold investments.

Have a good day,

Tom