This past Wednesday Som Seif, President of Claymore Investments Canada, appeared on BNN’s Market Call to take questions on ETFs. Here’s a brief recap of Seif’s market outlook and update on the state of ETFs in Canada and with Claymore specifically.
Canada’s Consumer Prices Fallen Most Since 1953
Seif doesn’t make a big deal of the news. Why? There’s a lot of noise in economic statistics right now and CPI incorporates lots of things. It’s problematic to look at CPI on a one-time basis. We’re in a recession, there’s not a lot of buyers, there’s inventory selloffs. “Of course there’s deflation right now;” Seif says, “but ultimately, there’s so much stimulus going on in the markets right now, and by the governments…. that this will lead to some inflation down the road.” Seif thinks we won’t see inflation in the next 12 months, and potentially not even in the next 18 months. But 3 and 5 years down the road, we will need to be prepared for an inflationary environment. Right now, there’s just no buying. The consumer is strapped both in Canada and the U.S. and is focused on paying off debt. That’s what the CPI numbers are reflecting more than anything else.
Leading Economic Indicators Rising For First Time in 12 Months
Following France, Germany and Japan’s positive GDP numbers, the crowd consensus now is that the recession is over. Seif agrees the recession is coming to a trough. Measures that governments have been taking over the past 12 months have been working and it’s time to start looking forward. Seif argues that these measures really did work to stave off a depression-type environment, which, he points out, was still the talk just 6 months ago. Now we’re talking just in terms of a recession, and even possibly of the end of the recession. Basically, according to Seif, it’s fair to say we can see the light at the end of the tunnel.
But there’s still a lot of problems to be worked out with the U.S. economy, which has, in the past, been so driven by its consumers. This will no longer be the driver – there’s going to be a shift. Part of the shift will definitely include making some room for China to be a major driver of the world economy, but Seif doesn’t see this shift happening yet in the next 12-18 months.
Still Bullish On This Stock Market Rally
Seif thinks we’ve just seen a normalization of valuation levels from what just 6 months ago were still depressionary expectations. We’re seeing a bit of a pullback now due to fears the market is overheated, but Seif sees the overall rally continuing until the end of the year, picking up again in the next month or so.
Seif Answers Questions On ETFs
Is there a Canadian ETF for specifically investing in Indonesia, Malaysia, and/or Pakistan? Seif: No. These economies are not developed enough yet to warrant their own ETF. Instead, look for more standard BRIC ETFs or the broader market emerging-market ETFs like Claymore’s CWO or iShares’ XEM. But if you did want to get that specific with investing specifically in Indonesia, it would be better to do it through an ETF rather than individual stocks. CWO actually hedges against the US Dollar, while XEM is not hedged.
What recommendations do you have on the Claymore Natural Gas ETF (GAS)? Seif doesn’t want to recommend specific entry points, but wants to point out that this ETF is based on the AEGCO (Alberta Exchange Gas Contract) and this makes it a physical natural gas play. There is no leverage involved with this ETF, but it does come with all the usual commodity risks, such as CONTANGO and volatility. Also, buyers should note that natural gas is the most volatile asset in the markets.
What recommendations do you have on the Uranium market and Uranium plays? First off, Seif notes that there is no ETF out there that is a 100% Uranium play. But there are two closed-end funds; one is the Uranium Participation Corporation, which trades on the TSX under the ticker symbol U, and this is a physical uranium investment. The second one is a closed-end, actively managed fund which also invests in Uranium companies. (Seif doesn’t give the ticker for this one, and in fact it seems as though he may have confused it with the first one). If you believe in nuclear energy’s future, uranium is a good area to be participating in.
How does the HNU ETF work? Seif: This is a leveraged ETF based on two times the daily movement of the markets on natural gas. There’s 3 things you have to think about here: (1) volatility risk (2) CONTANGO risk and (3) leverage risk. As a result, this ETF is best suited for day-trading. As a general rule, the higher the volatility on leveraged ETFs, the shorter the period you should hold them, because the daily rebalancing can eat up all your gains. Seif recommends a one-month maximum on the leveraged products, but a week or less is best. The leveraged and inverse-leveraged products are really suited for traders, not average investors. The other Horizons Beta Pro ETFs work similarly.
Comments on water ETFs at this point in the economy? Seif: playing this subsector means you’re thinking of it as an infrastructure and materials type of investment, where you’re playing water filtration and better resources globally. Seif agrees that water is more than a critical resource, and makes the very interesting point that currently, water does not even get priced into the manufacture of goods, because we’re used to having it for free. But these ETFs would have to be long-term investments.
What about the Claymore Silver Bullion ETF? Seif: this is actually not an ETF today, but a closed-end vehicle. It is a pure physical silver play and owns silver that is kept in a vault. It also hedges out the US dollar risk. So if you believe in the price of commodities going up with the US dollar falling, this is a great way to get that exposure.
Som Seif’s Top 3 Stock Theme Picks
(1) Rebalancing portfolios. After the great runs we’ve had, you need to rebalance. Sell some of your winners. Lock in some of your gains. Make sure your asset allocations are still meeting your goals.
(2) Preferred Shares. These have done well in the past couple of months. These are a tax-effective dividend vehicle. You have less risk in regard to banks cutting dividends, since these are less likely to be cut. Yields are still high here. But there is interest rate risk and the possibility of some being retracted.
(3) Hard asset commodities. Seif believes in the declining US dollar and this is the best way to protect against inflation. Consider CMW, Claymore’s broad mining play. Claymore doesn’t have a product just for base metals alone.
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{ 2 comments… read them below or add one }
Regarding the inflation surge to come, I saw the value investing legend Dreman had joined this bandwagon too, writing in Forbes last week. Consensus emerging!
Yes, I’m starting to get concerned about the increased consensus on the USD and this rally. Looked at a chart the other day showing how the USD and market performed opposite to consensus over past 10 years. We should be prepared for surprises, too.