The equity markets are moving away from
risk, and ever since traders turned their attention from the election to
more significant unknowns, the de-risk trade has been in full effect.
This is true of the equity markets at large, but
it's especially true of many stalwart "safe" high-yield sectors such as utilities.
But why have high-yield funds suffered the wrath of sellers?
Well, now that President Obama has won a second term, there is very real fear that
taxes on the wealthy, and particularly taxes on
dividend
income, will go up. The so-called "fiscal cliff" negotiations have yet
to begin, but the president already has said that a deal must include an
increase on the wealthiest 2% of Americans. If you take out your
politico-speak translator, what this really means is the likelihood of a
jump in tax rates, including a big increase in the dividend
tax rate from the current 15% to nearly 40%.
The likelihood of such a tax surge is in
part the driving force behind many a high-yield fund sell-off during the
past week, but in my view, the level of
panic selling in some funds means a very attractive buying opportunity.
One high-yield fund I am particularly fond of is the
Gabelli Global Gold, Natural Resources & Income Trust (NYSE: GGN).
This is a closed-end fund that invests in companies in the gold mining
industry, including industry stalwarts such as Barrick Gold (NYSE:
ABX), Goldcorp (NYSE:
GG) and Newmont Mining (NYSE:
NEM), to name some of the fund's top holdings.
What
makes this fund unique, and what gives it a very attractive income
stream, is the strategy employed by management. This involves the
writing (selling) of
covered call options on the equity securities in its portfolio. The strategy has resulted in the fund's ability to generate about a 12%
yield,
and along with the potentially huge upside in metals and mining stocks
the sector is capable of, makes GGN a compelling high-yield gold play
fit for both income investors -- and now especially for traders.
The reason this fund is fit for traders can be seen with one glance at the chart. GGN
shares
have plunged more than 12% in just the past week. That decline is no
doubt due to the fear of higher dividend taxes, but it's also due to
what's been called the "panic investing cycle."
My friend and colleague,
Doug Fabian, editor of the
Successful Investing and
High Monthly Income newsletters, describes this cycle as follows:
"The panic
investment
cycle is a migration in emotion from optimism to excitement, then
thrill, and then virtual euphoria about how well things are going.
Unfortunately, in the absence of the proper risk management tools, this
emotion usually morphs into anxiety once an investment begins to break
down. That anxiety then becomes denial, and it is at this point that the
fear factor invades. Soon after the fear comes the panic selling, and
it is at this
capitulation point, when nearly everyone is despondent, that the real opportunity for income investors presents itself."
I
suspect that we are very near this point in GGN, especially with this
natural resources fund at multi-year lows. Smart traders can buy into
this panic
profit
opportunity now, before the fiscal cliff and tax issues are resolved.
Because even if there is a marked tax increase on dividend income, the
beaten-down price of GGN means getting in on this fund during the fear
portion of the panic cycle -- and that's nearly always a winning trade.
Recommended Trade Setup:
-- Buy GGN at the
market
-- Set stop-loss at $11.34
-- Set initial
price target at $14.50, just above the
200-day moving average, for a potential 18% gain in two months
Arch Crawford of Crawford Perspectives,
renowned financial astrologist, sees very troubled times ahead. He
believes that a financial crash is imminent. His predictions have often
been spot on. Now he believes we’re entering a new period of changing
weather patterns, market meltdowns and political tyranny. While you
can’t necessarily set your watch to Arch’s predictions, they can be
extremely instructive and profitable. Arch believes that being short the
market at this time is a good bet. The major indexes have just broken
through their 200 day moving averages and that’s always an important
event. Combined with the current astrological formations, and he may be
on to something.
Click Here to Listen to the Audio
It
would appear that Americans are in general an optimistic bunch. The
slightest green shoot of economic growth, or market trend-reversal, or
Tigers’ home run in the World Series and it is instantly extrapolated
into “what could be”. The US housing market (among others around the
world) is just such a glimmer of hope (and homebuilder stock prices
surely provide all the proof you need… just like JCP’s 12% jump on 9/19? followed by its 46% decline since…).
The trouble is, no matter how much you want something to happen;
sometimes, there really is no way it’s ever gonna happen. To wit, the young/old dependency ratios in the following six major economies of the world suggest whatever 
