A Way To Hedge Against A Fickle Market

Editor’s note: The following piece is an advertorial.

At EverBank World Markets, a division of EverBank, we continually work to bring new and innovative products to the global markets. Our latest U.S. dollar-denominated MarketSafe® CD offering certainly meets this goal, as it is the first time we have offered a structure that includes a ‘hedge’ against a possible drop in the U.S. equity markets. The MarketSafe® Metals HedgeSM CD starts with two familiar pieces: Gold and Silver components, which each make up a quarter of the CD. The twist on this latest offering is that the remaining 50% component is tied to the inverse performance of the S&P 500, represented by the SPY ETF – a hedge on the U.S. equity market.1

The result of the design of this CD is that its performance will be maximized if, over the next five years, the price of gold and silver increase while the price of the SPY ETF decreases. Here is a way you can potentially hedge your U.S. equity exposure and, at the same time, gain access to precious metals all while maintaining 100% principal protection.2 We are truly excited to bring this unique opportunity to all of the loyal readers of the Daily Pfennig® newsletter.

Making A Case For Precious Metals
We’ve made the case for investing in precious metals numerous times here in the Daily Pfennig® newsletter – the diversification benefits alone of adding the non-correlated assets class of commodities to a typical investment portfolio could make metals an appropriate investment for many individuals. And, getting this exposure with the added benefit of no risk to the invested principal is an added benefit of the MarketSafe CD. This newest MarketSafe Metals Hedge CD has exposure to two of the most important precious metals: gold and silver.

Investors in gold and silver have been forced to ‘enjoy’ a bit of a roller coaster ride over the past several years as the prices of these precious metals ran up during the financial crisis as investors sought out safe havens. Quantitative Easing (QE) programs and the dramatic drop in interest rates that accompanied these programs made investing in the precious metals even more attractive, and prices continued to surge higher through the end of 2012. But, talk of an end to the QE policies here in the U.S. and the possibility of higher interest rates helped reverse these gains as prices of both gold and silver fell over the past two years.

There are many factors that could lead to a rebound in the price of precious metals, including central bank purchases (China in particular), the emergence of a ‘middle class’ in the emerging markets, a possible spike in inflation rates brought on by the massive amounts of liquidity pumped into the markets via QE, and finally, an increase in geo-political tensions that could send investors back to these traditional safe-haven assets. Chuck Butler and other contributors to the Daily Pfennig® newsletter have discussed these many factors at length in past, so I won’t go into further detail on these today. Feel free to check the archives on the Daily Pfennig® website if you want to review these in more detail.

U.S. Equity Markets Remain Near All-Time Highs
Global equity markets have had some great years recently, causing many to actually start to question the need for diversification. But, smart investors know markets can be fickle, and that they typically move in cycles. At least some of the credit for this latest market upswing has to be given to global central banks and their zero-interest-rate policies. These policies have kept interest rates at very low levels, giving investors little choice but to move funds into the equity markets in search of better returns. At the same time, companies have benefitted from these low interest rates, taking advantage to increase debt levels at these historic low levels just to turn around and purchase their own stock. Stock buy-backs certainly help drive the price of the shares higher, but I have to question just how long this financial engineering can continue.

Even the folks over at the Bank of International Settlements (the central bank of the global central banks) are worried about all of the QE that has propped up the markets. From their 2015 annual report: “The world will be unable to fight the next global financial crash as central banks have used up all of their ammunition trying to tackle the last crisis…Central banks have backed themselves in a corner after repeatedly cutting interest rates to shore up their economies… the result is too much debt, too little growth and too low interest rates…In short, low rates beget lower rates.”3

This equity party brought to you by zero-interest-rate policies just can’t go on forever.

The ‘Hedge’ On U.S. Equity Performance
Referring to the financial sense of the word, a hedge is designed to protect oneself financially or to minimize the risk of a bet. Odds are pretty good that most of you reading this have a majority of your investable net worth tied up in the U.S. equity markets. The latest Federal Reserve Statistical Release dated September 18, 2015, shows the largest percentage of investable assets for U.S. households is allocated to the equity markets at about 31%.4 Add to that the pension entitlements that are also largely invested into the equity markets and that number almost doubles. So, most of you have enough ‘skin in the game’ to make these recent market gyrations hard to stomach. The question most investors are asking themselves is, “Will the market continue to move higher on the back of a reinvigorated U.S. consumer or could these recent drops be a predictor of additional equity pain down the road?”

The hedge portion of our new MarketSafe Metals Hedge CD is designed to protect against a drop in the U.S. equity markets by linking one half of the CD’s performance to the inverse of the performance of the S&P 500. In simpler terms, if the stocks that make up the S&P 500 index (as measured by the SPY ETF) decrease across annual pricing dates during the 5-year term of this CD, then holders of this new CD could benefit.

Timing Is Everything
When it comes to investing, it is usually all about your timing. Markets can gyrate wildly in the short run, but typically revert back to longer term averages over time. This is one reason we have never suggested that investors should try to time the markets in the short term. But, that is not to say you shouldn’t take advantage of good timing if given the opportunity; and it sure looks like the time could be right for this new MarketSafe CD.

While past performance is not an indicator of future results, over the past few years, we have seen the price of precious metals fall while at the same time the U.S. equity markets as measured by the S&P 500 reached their all-time highs.

Details Of Our Newest MarketSafe Offering
Like all MarketSafe CDs, our new MarketSafe Metals Hedge CD is an indexed, U.S. dollar-denominated deposit product. This CD, which offers 100% deposited principal protection2, is a limited time opportunity that brings you access to the “long” upside potential of two metals: gold and silver, along with a hedge against the possibility of a drop in the U.S. equity market through a “short” position for the S&P 500 stock index. The maximum payout is set at 45% and the CD has a 5-year term and will use an annual average pricing model that some of our previous MarketSafe CDs have employed.1

The “long” metals components make up 50% of the CD, and the initial price of gold and silver at the issuance of the CD will be compared to the price of these metals on five annual pricing dates to determine these components’ performance. The percentage change of each of these prices, subject to a 45% cap for each reading, will be averaged at the end of the 5-year term; and 50% of the CD’s performance will be based on the equally weighted value of the averages of these two metals components.

The “short” SPY ETF component makes up the other 50% of the CD. The initial value of the SPY ETF will be compared to the price of the SPY ETF on the five annual pricing dates. The inverse of the percentage change on this index, subject to a 45% cap, will be averaged at the end of the 5-year term and will make up the other 50% of the CD’s performance. The potential market upside payment will be based on how the components perform, as described above and in more detail in the term sheet.

As with all MarketSafe CDs, should the overall performance be negative, you’ll get your principal back; this is 100% principal protection.2 All of the disclosures, terms & conditions, and anything pertinent to this CD can be found on our website, or we can send them to you, if requested. This CD does not pay a periodic rate of interest or annual percentage yield.

We are very excited to be able to finally offer a MarketSafe CD that provides a hedge on the U.S. equity markets. Open and fund your CD by November 12, 2015, to secure your spot in this innovative way to participate in the metals markets and hedge your U.S. equity exposure with no risk to your principal deposit. You can find more information and/or apply by clicking here.

Until my next opportunity to share my thoughts with you in another Daily Pfennig® edition…

Mike Meyer
Vice President
EverBank World Markets, a division of EverBank