Effectively, the CME is lowering the cost to trade crude oil, gold, silver, copper, and a few other commodities. So far this has had no impact on prices of the SPDR Gold Trust (NYSE: GLD), United States Oil Fund (NYSE: USO), iShares Silver Trust (NYSE: SLV), nor in the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC).

In the past, margin costs were raised on traders as an effort to curb runaway trading to the upside by making it more expensive for traders and speculators to trade energy and metals.  In short, driving up the cost of poker creates fewer gamblers. So what happens when they make it cheaper to trade?

The full details are here.

JON C. OGG

iShares MSCI Global Agriculture Producers Fund (NYSE: VEGI) targets the front end of the production chain (fertilizers or agricultural materials) while excluding exposure from companies at the end of the production chain (packaging and marketing). This is a bit similar to but nowhere near identical to the Market Vectors Agribusiness ETF (NYSE: MOO).
 
iShares MSCI Global Energy Producers Fund (NYSE: FILL) tracks the MSCI ACWI Select Energy Producers Investable Market Index.  This is similar to the ProShares Ultra Oil & Gas (NYSE: DIG), but without the leverage.

iShares MSCI Global Select Metals & Mining Producers Fund (NYSE: PICK) aims to track the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index. This one is not identical to but has overlaps with the SPDR S&P Metals & Mining ETF (NYSE: XME).

iShares MSCI Global Gold Miners Fund (NYSE: RING) aims to track the MSCI ACWI Select Gold Miners Investable Market Index.  We consider this an alternative to the Market Vectors Gold Miners ETF (NYSE: GDX).

iShares MSCI Global Silver Miners Fund (NYSE: SLVP) aims to track the MSCI ACWI Select Silver Miners Investable Market Index.  We would consider its an alternative to the Global X Silver Miners ETF (NYSE: SIL).

As far as why these are different from some other ‘production’ ETFs, iShares explains that these include only companies at, or near, the initial phase of production of the commodity. Investors can target the front end of the production chain instead of including the back-end of the production chain to focus on the aspects more sensitive to fluctuations in the underlying commodity price.  Companies further down the production cycle are impacted by a number of factors in addition to commodity prices.

An ETF for just about anything… now competing ETFs for many more strategies.

JON C. OGG

The Institute for Supply Management has issued its reading for January non-manufacturing and the data is strong.  Very strong.  At 56.8, this is the best reading in almost a year.  Dow Jones was only calling for a reading of 53.1.

The business index was 59.5 versus 55.9 in December.  Employment showed the biggest gain to 57.4 from a prior December reading of 49.8 and prices rose only to 63.5 from 62.0 in December.  Even new order picked up to 59.4 from 54.6 in December.

The news this morning, particularly after the stellar jobs numbers, is really hurting longer-dated Treasury prices and driving yields higher.  The Fed Funds Futures are signaling a much quicker rate hike scenario than just a week ago.

The iShares Barclays 20 Year Treasury (NYSE: TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and its price is down 2.3% at $116.39. The ProShares UltraShort Lehman 20+ (NYSE: TBT), which is double inverse the price action (intraday) is up a whopping 4.6% at $19.32 on the day.

JON C. OGG

Belgium LT IDR downgraded to ‘AA’ from ‘AA+’; Negative Outlook; ST IDR  affirmed at ‘F1+’: iShares MSCI Belgium Index Fund (NYSE: EWK) is still up 0.4% at $11.33; 52-week range $10.23 to $15.65.

Ireland LT IDR affirmed at ‘BBB+’; Negative Outlook; ST IDR affirmed at ‘F2′:  Bank of Ireland (NYSE: IRE) down 1.6% at $6.15; 52-week range of $3.99 to $27.00 (adjusted for reverse split). MSCI Ireland Capped Investable (NYSE: EIRL) is down 1.5% at $20.17; 52-week range is $16.78 to $23.80. The Irish Investment Fund, Inc. (NYSE: IRL) is still up almost 1% at $7.22 and its 52-week range is $6.49 to $8.77.

Italy LT IDR downgraded to ‘A-’ from ‘A+’; Negative Outlook; ST IDR downgraded to ‘F2′ from ‘F1′: iShares MSCI Italy Index Fund (NYSE: EWI) is down 0.8% at $12.92; 52-week range is $10.88 to $20.15. Telecom Italia S.P.A. (NYSE: TI) is flat at $10.33 an dthe 52-week range is $9.74 to $16.04.

Spain LT IDR downgraded ‘A’ from ‘AA-’; Negative Outlook; ST IDR downgraded to ‘F1′ from ‘F1+’: iShares MSCI Spain Index Fund (NYSE: EWP) is still up 0.4% at $31.44 against a 52-week range of $28.53 to $45.99. Banco Santander, S.A. (NYSE: STD) is still up 0.7% at $8.16 against a 52-week range of $6.77 to $12.72.

Two more downgrades were issued:

• Cyprus LT IDR downgraded to ‘BBB-’ from ‘BBB’; Negative Outlook; ST IDR affirmed at ‘F3′
• Slovenia LT IDR downgraded to ‘A’ from ‘AA-’; Negative Outlook; ST IDR downgraded to ‘F1′ from ‘F1+’

Should this have really been a surprise?  If so, these would be performing far worse.

JON C. OGG

SPDR Barclays High Yield Bond (NYSE: JNK) carries a 7.7% listed yield and is up 0.25% at $39.00 against a 52-week range of $34.09 to $40.93 and it is the primary ETF we look at when it comes to the world of high-yield or junk bonds.  Then there is the iShares iBoxx High Yield Corporate Bond (NYSE: HYG) up 0.1% at $89.69 with close to a 7.7% yield and a 52-week range of $77.90 to $92.85, followed by the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSE: PHB) that is flat at $18.34 with a yield of about 6% and a 52-week range of $17.00 to $18.76.  You have to consider that the 10-Year Treasury yields close to 2%, but high-yield and junk bonds often pay 7%, 8%, or more.  Here are some of the top closed-end funds, although there are many more out there:

• Blackrock Corporate High Yield (NYSE: HYV): market cap of $396 million with shares up 0.3% at $12.02; 52-week trading range of $10.10 to $12.60; implied yield of 8.5%.
• Pioneer High Income Trust (NYSE: PHT): market cap of $480 with shares up 0.7% at $17.07; 52-week trading range of $14.12 to $18.08; implied yield of 9.6%.
• PIMCO High Income Fund (NYSE: PHK): market cap of $1.5 billion with shares down 0.1% at $12.62; 52-week trading range of $10.52 to $14.88; implied yield of about 8.5%.
• AllianceBernstein Global High Income Fund, Inc. (NYSE: AWF): market cap of $1.2+ billion with shares up 0.9% at $14.47; 52-week trading range of $12.43 to $15.41; implied yield of 8.3%.
• Western Asset High Income Fund II Inc. (NYSE: HIX): shares are up 0.4% at $9.84; 52-week trading range of $8.35 to $10.45; implied yield of about 10.0%.
• Western Asset High Income Opportunity Fund Inc. (NYSE: HIO): shares are up 0.8% at $6.32; 52-week trading range of $5.34 to $6.63; implied yield of 8.0%.

We do advise investors to study the current premium and discount that each closed-end fund trades at compared to the net asset value.  Some are discounts and some are premiums, and these can fluctuate wildly through time for a myriad of reasons.

While that is a composite and while the “BB” is now under 500 basis points over Treasuries, the “B” spread is now under 750 basis points over Treasuries.  Maturities matter here as the longer-dated notes and bonds command higher spreads than most shorter-dated instruments.  Still, this could be the beginning of a wave of continued interest in junk bonds.

What is interesting is that rising yields in Treasuries implies losses on the face value of bonds.  If the yields are rising because of an improving economic picture rather than because of inflation or because of a lack of faith in the underlying creditworthiness of the government, then the bond spreads are likely to contract further and that would drive the interest into high-yield junk bonds.

Be advised that not all junk bond funds are created equally outside of the ETFs.  Some closed-end funds use domestic junk bonds only, while some use international bonds.  Some include foreign-issue sovereign debt at junk levels or trading as though they are junk.  Aslo, some use a bit of leverage while others do not.  The dividend yields are “implied” because ethe closed-end funds pay monthly.

Another caveat needs to be mentioned… Some of the yields on financial quote screens also will differ from our implied yields because we do not include the capital gain distribution that comes with many of these.  They of course count toward your total return, but we like to look at the most recent ‘regular dividend’ when calculating yields.

We have provided a chart for the “JNK” ETF Below so you can see how much this sector has risen since Thanksgiving and then again since the selling climax of stocks and risk instruments (including junk bonds) in early October.

A true chartist would tell you to watch this current level closely.  If prices do not rise from here, it could be representative of a false break-out and that would imply a near-term top.  As long as the “risk-on” mentality prevails, these should do well.  The trick is watching longer-term Treasury yields.  With close to a 2% yield on the 10-Year Treasury Note, investors will seek higher returns as long as those returns are likely to have at least some degree of price stability.  If investors think that Treasury yields are likely to climb suddenly to 3% or even 4%, junk bonds will have some competition from the risk-free trade again.

As you would expect, there is no such thing as a free lunch in the financial markets.

JON C. OGG

As far as how this is impacting closed-end funds and ETFs, the moves are below and the 52-week ranges have been offered so that investors can see just how much pain has been there in the last year:

WisdomTree India Earnings (NYSE: EPI) is up 0.9% at $17.93 and the 52-week trading range is $15.44 to $25.58. 

PowerShares India (NYSE: PIN) is up 0.8% at $18.30 and the 52-week range is $15.96 to $24.59.

India Fund, Inc. (NYSE: IFN) is up 0.4% at $21.46 and the 52-week trading range is $18.61 to $33.99. 

Morgan Stanley India Investment Fund, Inc. (NYSE: IIF) is up 0.7% at $15.75 and the 52-week trading range is $13.59 to $24.57.

These are no ETFs nor closed-end funds but there are some key ARDs to watch:

Infosys Limited (NASDAQ: INFY) was recently butchered on its earnings and revenue warnings and shares are only up marginally at $52.00 versus a 52-week range of $46.12 to $74.52.

Tata Motors Ltd. (NYSE: TTM) is up 2.2% at $21.18 versus a 52-week range of $14.33 to $29.06.

ICICI Bank Limited (NYSE: IBN) is up only 0.25% at $30.95 against a 52-week range of $24.14 to $51.50.

Sterlite Industries (India) Limited (NYSE: SLT), which operates as a non-ferrous metals and mining company, is up 1% at $8.67 versus a 52-week range of $6.64 to $16.60.

$35 billion might not sound like much when you consider the U.S.-sized stimulus packages and when you consider that India has almost 1.2 billion people versus about 310 million in the U.S.  The 2010 GDP on a purchasing power parity was put at about $4.06 trillion and that comes to only about $3,500 in GDP per capita.

$35 billion matters, even if it is going to take more to jumpstart the economy after months and months of tightening and restive monetary measures as the nation fought inflation at the expense of growth.

JON C. OGG

The firm downgraded price targets of copper, nickel, zinc, and alumina as well as part of the broader macro-market call in metals.  As far as the gold target, Morgan Stanley cut the 2012 target by about 16% to $1,845 per ounce.  On silver, the call was down almost 30% to $35.50 per ounce.

Neither are hurting any market gains, but it was interesting to see that the cut in silver was the highest, followed by gold.  The other cuts in the other metals seen in the call were to the tune of about 3 percentage points to about 13 percentage points. These markets are reacting to currencies and economic data more than economist and price target calls.  Still, these were worth a closer look.

JON C. OGG

Solar makers are trying to stage a recovery.  First Solar, Inc. (NASDAQ: FSLR) is the leader of the pack in quality and operations and its shares are up about 9% at $42.30 versus a 52-week trading range of $29.87 to $175.45.  Even more impressive is the move in shares of MEMC Electronic Materials Inc. (NYSE: WFR) with a 17% gain to $4.58 versus a 52-week range of $3.65 to $15.04.  Even the Guggenheim Solar (NYSE: TAN) ETF and the Market Vectors Solar Energy ETF (NYSE: KWT) are surging.  We are paying close attention to SunPower Corporation (NASDAQ: SPWR), Suntech Power Holdings Co. Ltd. (NYSE: STP), Yingli Green Energy Holdings Co. Ltd. (NYSE: YGE), LDK Solar Co. Ltd. (NYSE: LDK), Energy Conversion Devices, Inc. (NASDAQ: ENER) and others as well.  Here are the other movers with relative prices to their 52-week highs:

• SunPower Corporation (NASDAQ: SPWR) is up 9.5% at $7.33, down from a year high of $23.36;
• Suntech Power Holdings Co. Ltd. (NYSE: STP) is up a whopping 25% at $3.22 versus a year high of $10.83;
• Yingli Green Energy Holdings Co. Ltd. (NYSE: YGE) is up 17% at $4.85 versus a year high of $13.59;
• LDK Solar Co. Ltd. (NYSE: LDK) is up 11.3% at $5.21 against a high of $14.97 in the last year, although it is easy to stick by the guns that LDK is mathematically bankrupt without the coverage of the Chinese government.
• Energy Conversion Devices, Inc. (NASDAQ: ENER) is up 23% at $0.38 against a high of $4.80 but this is one still is unlikely to survive 2012.

In the world of ETFs, these are running as well: Guggenheim Solar (NYSE: TAN) is up 10.5% at $2.95 versus a high of $9.16 and Market Vectors Solar Energy ETF (NYSE: KWT) is up 11.5% at $4.45.  The more diversified alt-energy ETF of PowerShares WilderHill Clean Energy (NYSE: PBW) is up less than all of these with gains of 4.8% at $5.65.

Before getting too euphoric keep in mind that this is not unusual at the start of a year or new period where sector rotation favors the most beaten up sector.  Besides that, there is always the political angle on the solar sector that is front and center in the elections this year.

What we do know within reason is simple: solar PV unit prices cannot drop by another 50% or so in 2012.  If pricing has bottomed, perhaps these value traps may get to migrate to value stocks after all.  We still expect margin pressure, austerity, and a lack of the ability to pay dividends to all equal concerns of PV panel dumping by Chinese firms leading to a virtual race toward zero.

If you want to know just how big this news is, the S&P Utility Sector was the best performing sector in all of 2011 and its gains were not quite 15%.  To prove the point, the Utilities Select Sector SPDR (NYSE: XLU) ETF rose by 19% in 2011 if you adjust for the dividend payments as so many utilities offer investors dividend yields of 4% and higher.

JON C. OGG

Each year, you often see the same trend over and over: “Buy the weakest sectors and dump the strongest.”  Maybe there is a value in the weakest links and maybe too much a premium in the strong sectors.  The Financial Select Sector SPDR (NYSE: XLF) is off to a great start in 2012, while the Utilities Select Sector SPDR (NYSE: XLU) has been very weak.

All you have to do is look at the extremes… Bank of America Corporation (NYSE: BAC) was the worst DJIA stock of all in 2011 but now shares are up literally 19% since the end of 2011.  J.P. Morgan Chase & Co. (NYSE: JPM) is even up over 9% since the end of 2011 and it has earnings due in just two days.  With the huge discounts to book value, the thought is that there is value even with the headwinds facing the banking sector’s ability to generate solid earnings.  BofA was recently shown as one of the DJIA stocks with the most implied upside.

What about American Electric Power Co., Inc. (NYSE: AEP) bounced a bit off the lows in the last two days but its shares had been down almost 2% so far this year after just six trading sessions. Duke Energy Corporation (NYSE: DUK) was down almost 3% from the end of 2011 before a small bounce.  Many utilities are trading at close to 13-times earnings now, which historically could imply a premium being paid to get those dividend yields of 4% and higher.  AEP remains in our 2012 Model Dividend Portfolio and that will only change if the price rises too much.

All you are seeing is a reverse of the flight to safety because many believe that the economy has escaped another recession or that the worst was priced in.  Before giving up entirely, interest rates are likely to remain very low and that drives investors toward stable income sources.  Utilities also win from low interest rates because of borrowing costs.  As far as the banks, the woes of Europe are not yet gone and the utilities have little to no real exposure there.  If everyone is wrong about no second recession, which has better visibility… utilities or banks?

JON C. OGG

The average yield is -0.0122%, down from a whopping 0.001% previously. We would be watching PowerShares DB German Bund ETN (NYSE: BUNL) and PIMCO Germany Bond Index ETF (NYSE: BUND) in reaction.  There is also the parabolic PowerShares DB 3x German Bund ETN (BUNT) as well, but there may be much different tracking issues on a leveraged exchange traded product that has different trading hours than the market it tracks. 

At issue is not whether or not this persists forever, because it cannot be the case.  It is unfathomable if not mathematically impossible.  More important is what the implication is for overnight and money market funds.  In the U.S., these are supposed to trade “at the buck” and that implies that the value is always $1.00 per share no matter what and that interest is paid out.  The firm hosting the fund has to have a management fee of some sort as well.

When negative rates are paid out it implies that the money market funds are paying out a negative yield and that implies that the funds are “breaking the buck.”

Again, this cannot go on indefinitely but it can create new previously uncharted problems in the near-term.  It is not exactly as if the European banks and fund management families are going to want to pay up the difference to keep the fund values at the equivalent of 1.00 in Europe.

No wonder the Euro has lost so much against the Dollar.  At least the German investors can get about 0.1% in America.

JON C. OGG