The FOMC can no longer lower rates on the short-end.  The other side of the coin is that it can promise to keep rates low indefinitely.  Quantitative easing is accomplished by Uncle Sam expanding its balance sheet by buying up debt on the long-end of the yield curve and keeping rates at near-zero on the short-end.  The new verdict seems to be a few hundred billion rather than $1 trillion that will be purchased in Treasury and other debt instruments in the coming weeks.  Some would like to see more, others would prefer no QE2.

The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late.  It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation.  Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.

The FOMC wants inflation higher, yet it wants rates to stay very low.  These notions fly directly against each other in the long-term, and Ben Bernanke did not exactly get the name Helicopter Ben out of the blue.  It seems that our government is about to turn on the printing presses so it can buy debt.  Yep, devalue your currency but artificially keep the rates lower by buying the debt up.  It almost sounds like tech companies with stock options and non-GAAP earnings.

The rule is and has always been, “Don’t Fight the Fed.”  We can complain about the reckless nature of QE2 and the shackles it may put on the next two or three generations or we can generate trading strategies.

Gold in them thar hills…

When it comes to gold, the SPDR Gold Trust (NYSE: GLD) is king with millions of shares traded each day and with assets above $50 billion.  But what about leveraged ETF or ETN products?  If inflation is going to be manufactured and if gold keeps rising as world central banks race to devalue their currencies, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer.  Keep in mind that this is an exchange-traded note rather than a true asset trust with physical gold.  The “DGP” gives double the performance of gold.

What about betting for or against currencies?

If everyone is devaluing at the same time, then about the only safe bet for a country that might try to hold the line is Switzerland for their Swiss Franc.  The Swiss Franc can be bought either directly or it can be bought via the CurrencyShares Swiss Franc Trust (NYSE: FXF).

The other exception is potentially the Chinese Yuan if the U.S. Congressional move to try to wrangle China from such a tight currency peg.  If China were to de-peg, we have yet to find a real investor who says that China’s Yuan would actually fall against the US Dollar as China’s reserves and fundamentals are among the best globally.  There are two direct beneficiary ETF/ETN products here that will win if China is forced to appreciate the Yuan: WisdomTree Dreyfus Chinese Yuan (NYSE: CYB) and the Market Vectors Chinese Renminbi/USD ETN (NYSE: CNY), although the latter is far less liquid in volume.

Do you not believe that the dollar drop will continue endlessly?  As most financial events peak, markets do usually attempt to discount the news and try to at least work toward the efficient market theory where markets price in almost all available information and discount the rest of the news (so what if it doesn’t work).  If you believe that the Greenback will actually rally soon if and/or when QE2 finally launches, then there is the PowerShares DB US Dollar Index Bullish (NYSE: UUP).  In short, this is the ETN that tracks the Deutsche Bank Long US Dollar Futures index, but be advised that the index is comprised of long futures contracts  rather than of raw currency.  It is also nearly impossible to forget the one rule if you are a US investor: You are already long the US dollar.

• Alliance Bernstein (AB) Raised to Outperform at KBW.
• Arkansas Best (ABFS) Cut to Underweight at JPMorgan.
• Con-Way (CNY) Cut to Neutral at JPMorgan.
• Dick’s Sporting Goods (DKS) Started as Overweight at Lehman.
• Franklin Resources (BEN) Cut to Market Perform at KBW.
• Kennametal (KMT) Cut to Sell at Goldman Sachs.
• Old Dominion Freight Line (ODFL) Cut to Neutral at JPMorgan.
• Otter Tail (OTTR) Raised to Outperform at Baird.
• Pzena (PZN) Cut to Underperform at KBW.
• Raymond James Financial (RJF) Cut to Market Perform at KBW.
• St. Joe (JOE) Cut to Market Perform at KBW.
• T. Rowe Price (TROW) Cut to Underperform at KBW.
• YRC Worldwide (YRCW) Cut to Underweight at JPMorgan.

Jon C. Ogg
September 22, 2008

• Market Vectors-Chinese Renminbi/USD ETNs (NYSE: CNY) is based on the S&P Chinese Renminbi Total Return Index, which seeks to track the performance of China’s renminbi against the U.S. dollar.
• Market Vectors-Indian Rupee/USD ETNs (NYSE: INR) is based on the S&P Indian Rupee Total Return Index, which seeks to track the performance of India’s rupee against the U.S. dollar.

These are not your typical ETN’s, nor are they your normal ETN’s.  There have recently been other currency exchange traded notes launched on NYSE that have been geared to track the Euro, the Swiss Franc, the Canadian Dollar, the Australian Dollar, and the British Pound.

Jon C. Ogg
March 17, 2008