Evercore Wealth: Smart Money Buys Chinese Money,Munis, Global Index And Gold Options

Chinese currency might be a good buy
The Evercore wealth managers, of the once highly esteemed U.S. Trust,
are looking for 3.5% GDP growth, stocks up, dollar strong, gold down
and QE2 to be over in 2011.

Bullish on US stocks(70% of client equity accounts), Evercore warns of
a bubble bursting when and if QE2– the pouring of liquidity into the
financial markets by Ben Bernanke's Fed does come to an end in early
summer. Since 2008 Evercore figures quantitative easing has
represented a mighty 150% increase in liquidity.

At lunch on Monday, John McDermott, Evercore partner, revealed the
firm had sold 40% of its diversified hedge fund's gold positions–
but was hedging by using a fraction of the proceeds to buy options on
gold– a highly leveraged way to obtain a high return if gold rises
this year. All that Evercore has risked is the cost of the call
option, a tiny fraction of the $1300 plus cost of 1 ounce today.

Evercore is not backing off of tax free munis for its clients, though
its worried about the ability of California and New York to realign
their budget deficits.. Rather, it has been buying municipal bonds
yielding from 4.5% to 5% to maturity on the basis that income tax
rates are going to rise, making the equivalent taxable return on
tax-free securities above 6%. Jeffrey Maurer, Evercore Wealth
Management CEO reckons the interest owed investors by New York State
is only 4.3% of the total state budget, and easily managed.

On China, Evercore is looking for higher interest rates and lower
prices for Chinese equities. It believes the yuan will gradually be
allowed to float and increase in price. And as Streettalk recommended
recently, Evercore is buying the ETF CYB, Wisdom Tree's play on the
Chinese currency as a way to participate without any risk in China.
Two extra pluses for the yuan; Americans can now open up bank accounts
denominated in yuan; and Chinese companies can use their yuan to
invest outside of China, especially in the U.S., where they may begin
acquiring part or all of a U.S. company.

If the yuan appreciates, it will be beneficial for the securities and
currencies of Vietnam, Malaysia, Korea, Australia and Indonesia,
Evercore believes. Also, Evercore management suggests investors no
longer use the S&P 500 Index (SPY) as their portfolio performance
measuring rod but switch to a global basket like the MSCI All World
Index (MXWD).

The key risk for U.S. stocks will come this summer when QE2 definitely
must come to an end, asserts Evercore. Then, the obstacle could become
even higher interest rates and growing disenchantment for equities.
There has been an 150% increase in the money supply by the Fed since
2008, according to Evercore.

And the issue for investors is what happens when the Fed takes the
liquidity away. No clear answers were forthcoming yesterday.
Source: Forbes.com