Sica doesn't expect a full-blown Armageddon if the U.S. loses its prestigious triple-A rating, but the outcome is certainly not all sunshine and flowers. After a downgrade from the S&P, Sica says pension funds with mandates of triple-A rated holdings will be forced to sell government issues, triggering a surge in yields as prices plummet. Borrowing costs will increase as the biggest holders of debt lose faith in the U.S. government and sell Treasuries.
Outside of the bond market, the dollar will decline against the yen, euro and Swiss franc, Sica predicts. Money markets will trade below net asset value, which could prompt nervous selling, he says. Consumer confidence will plunge further as well. The Bloomberg U.S. Consumer Comfort Index fell to a reading of -46.8 last week from a prior reading of -43.3, a sign that consumers are very pessimistic already.
Because of his view, Sica is positioning his investors for a downgrade. His strategy is straightforward, as he's increasing his cash levels to over 50%, he's holding about 10% to 15% of his assets in precious metals like gold and silver, and he is buying oil-related assets as he expects oil prices to continue higher. He is a buyer of the iShares Dow Jones U.S. Oil Equipment Index (IEZ) and the iShares Dow Jones U.S. Oil & Gas Exploration Index (IEO).On the other hand, Sica says he has cut his position in equities to under 10%. Most of the stocks his firm owns are related to mining, like Freeport-McMoRan (FCX - Get Report). "We feel a lot more comfortable with stocks like that because there is not a lot of supply of gold or silver," Sica says. "We've been buying those types of companies." Gold and silver trades have been extremely profitable lately on rising fear. For example, the SPDR Gold Trust ETF (GLD) has jumped 8.2% in July, and the iShares Silver Trust ETF (SLV) has jumped an impressive 13.6%. Sica is also making several politically unpopular bets, such as shorting the U.S. Treasury as well as the dollar. That bet is based on the expectation that bond yields will rise and the dollar will depreciate. He is buying exchange-traded funds that are short Treasuries, including the ProShares Short 7-10 Year Treasury ETF (TBX), the ProShares UltraShort 20+ Year Treasury ETF (TBT) and the ProShares UltraShort 3-7 Year Treasury ETF (TBZ), to capitalize on the inevitable rise in interest rates. "I've had people say it's politically incorrect to bet against the U.S. Treasury," Sica says. "People will say that it's unpatriotic. I'm very patriotic in my love for this country and everything about this country. But what has made this country great is our economic responsibility to our taxpayers and citizens. From my core function to manage money professionally, we feel the U.S. Treasury will fall in price and rise in yield. We're using strategies that will profit from that." -- Written by Robert Holmes in Boston.
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