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Some Bull & Bear ETF Picks for the New Year

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“It’s tough to make predictions, especially about the future,” quipped the great Yogi Berra. Nevertheless, it’s important to observe market forces and capitalize on future trends.

To that end, I assembled a short list of mega investment themes for investors to watch for in 2016 and the ETFs that reflect those themes.

An Active Federal Reserve

It’s widely presumed that during presidential election years the Federal Reserve is inactive when it comes to making major changes or decisions to monetary policy in order to avoid the perception of being politically motivated.

Contrary to popular views, the Fed has indeed been quite active during presidential election years. The 10 presidential election years since 1976, the Fed has left interest rates virtually unchanged only twice during – in 1996 and 2012.

Looking ahead to 2016, don’t let the presendital election year trick you into falsely believing the Fed will stay docile and inactive. The historical record shows that when it comes to making major monetary decision adjustments, the Fed doesn’t let politics get in its way. And with the cycle of interest rates now heading up, it will have a profound impact on all asset classes – especially bonds with long-term maturities.

Commodities Stabilize

Since 2011, global commodity prices have fallen five consecutive years. And the GreenHaven Continuous Commodity Index Fund (GCC), a broad measure of the group, is coming off its worst yearly performance since 2011 with a loss near 18%. Although the energy sector contributed to most of the losses over the past 12-months, agriculture (DBA) and precious metals (GLTR) are stuck in multi-year bear markets.

Trends don’t last forever and the strong dollar/weak commodities theme will eventually cease to exist. Any type of sustained stabilization in commodity prices, particularly oil, would be an early sign market dynamics are changing.

For patient bottom feeders, equity sectors tied to commodities like energy (XLE), miners (GDX), and natural gas (FCG) will offer upside potential. The darkest hour is right before dawn and right now the commodities group is awfully dark. But this too shall pass.

Higher Waves in High Yield Debt

The December 2015 meltdown of Third Avenue’s defunct $788.5 million Focused Credit Fund (TFCVX) is an unsettling preview of trouble ahead in the high yield market.

Over the past several years, $1.97 trillion in newly created high yield corporate debt has been issued, according to Dealogic data. High-risk borrowers have clearly taken advantage of low borrowing rates while yield hungry investors have snapped up the debt in desperate search of higher yields.

In 2015, the SPDR Barclays High Yield Bond ETF (JNK) declined around 4% and posted its first yearly loss since 2008. And even larger losses could be ahead as the Fed’s cycle of higher rates takes grip.

Borrowing costs will rise and companies with the weak businesses and balance sheets will have problems servicing their debt.  ETFs that are bearish on junk bonds, like the ProShares Short High Yield Fund (SJB), may get their day in the sunshine after all.

Euro/Dollar Parity

Just before the onset of Europe’s 2009 financial crisis, the Euro was being touted as the world’s next reserve currency that could soon overtake the U.S. dollar. I remember this because at the time I was on a family vacation in Italy and the cost of everything was at a 44% premium to the dollar. 

What about now? Since late 2009 to present, the CurrencyShares Euro Trust (FXE) has crashed almost 30%. That’s not the kind of behavior you’d expect from a would-be reserve currency.

This time around, the prospect of more monetary easing by the European Central Bank (ECB) could push the euro to parity with the dollar. It came close happening last year and 2016 could be the year it actually occurs. 

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