Trends I'm Watching

10 Key Trends for Investors in 2009

Link: 10 key trends for investors in '09 - MSN Money - Jubak's Journal.

 10 macro trends from Jim Jubak:

1. Go where the growth is, and that means putting some money into the developing economies of China, India and Brazil.
2. The rise of the global blue chips. These companies are emerging from the world's developing economies to challenge Coca-Cola (KO, news, msgs), IBM (IBM, news, msgs) and Wal-Mart Stores (WMT, news, msgs) on the global stage.
3. The world is getting wealthier and older at the same time. So who's going to manage all that retirement money?
4. Inflation is beginning a new era. After 20 years of low inflation, the world is headed for a decade of rising prices.
5. The world may not be running out of oil -- then again, it might be -- but it sure has run out of cheap oil. You can make back in the stock market what you pay at the pump -- and more.
6. The commodity crunch. Developing economies are demanding more iron, more copper, more nickel, more coal -- and that has set off a boom for mining companies and the companies that equip them.
7. Food is the new oil. It's turning out to be as hard to increase food supplies as it is to find new oil. We're looking at a decade of higher food prices driven by competition with biofuels and the fact that people in the developing world will eat more pigs, chickens and other sources of protein as their incomes rise.
8. We've dragged our feet, but environmental problems have become so pressing that it's time to save the world and make a buck.
9. The technology sector doesn't look anything like it used to, but fortunately the same rules still apply to what I call "hidden tech" stocks.
10. It used to be that stocks and bonds from the United States got a premium in the financial markets just for showing up. Investors were willing to pay more because the U.S. markets were so stable. They're still among the world's best in that category, but now they've got company from Canada, Australia and, of all places, Brazil.

3 Hot Trends for 2009

Link: 10 key trends for investors in '09 - MSN Money - Jubak's Journal.

Jim Jubak's 3 hot trends for 2009:

• Inflation. Gold has started to move up. The U.S. dollar has started to move down. Overseas investors are cutting back on their purchases of dollar-denominated debt. And the faithful news consumer can see the beginnings of a tidal wave of articles and editorials worrying about the inevitability of inflation now that the Federal Reserve has decided to pay overtime to the crew that prints paper money.

• Food. Yes, food commodity stocks collapsed in 2008. And, yes, prices for food commodities went into a retreat that turned into a rout; the prices of major grains are down 50% from their 2008 peaks. But don't count on food getting cheaper still in 2009. All the signs point the other way. The United Nations' Food and Agriculture Organization has warned that because of the global credit crunch, many farmers lack capital to buy seed and fertilizer for the 2009-10 growing season. That's likely to show up in commodity prices, via the futures market, by mid-2009.

• Stability. Companies able to deliver solid revenue and earnings at or maybe even a little above expectations are rare as hens' teeth at this stage of the recession. Companies with those kinds of results are also in a position to use the current global slowdown to attack weaker competitors, buy market share and aggressively develop new products. That's a combination investors particularly prize in the current uncertainty.

When Oil Prices Rebound...

Trend: Oil prices will hit bottom soon and then start climbing again.

Jason Simpkins at Money Morning suggest some oil investments for the rebound. Excerpts below.

Link: Why Crude Oil Will Present Investors with a Golden Opportunity in 2009.

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits - propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP  (UGA).

Health Care Costs Shifting

Trend: Employers are transferring health care costs to employees.

John Markman as MSN Money recommends a drug company with products that are not optional. Excerpts below.

Link: The Fed's desperation move - MSN Money.

There has been a widespread shift of health care responsibilities from employers to employees at cost-cutting companies. Yet there are still some drug companies whose products are so necessary that they are battling the trend and profiting handsomely.

One that has caught my eye is Endo Pharmaceuticals (ENDP), which focuses its research and production efforts on pain-management drugs. Where you might skip a visit to a doctor if you have the flu or other minor ailment, chances are you will fill a painkiller prescription for a broken bone even if you have to pay out of pocket.

Endo's portfolio of drugs, which includes Percocet (oxycodone with acetaminophen), generates annual sales in excess of $1.2 billion. The company's top-selling product is the Lidoderm patch, a lidocaine patch with Food and Drug Administration approval to treat shingles that is commonly used off-label for general pain relief. Sales have climbed from $40 million in 2001 to more than $700 million last year. No generic alternative is expected until 2013, which gives the company time to invest in its next generation of pain relievers. Other drugs include Frova, which is approved for use in the treatment of menstrual migraines, and Voltaren Gel, with is a topical anesthetic used to treat joint pain associated with osteoarthritis.

For better or worse, pain relief is a growth industry as the baby boomers age. According to the U.S. Census Bureau, nearly 8,000 individuals turn 60 each day. Their health care expenditures typically rise from $2,695 when age 45 to 54, to $3,262 when 55 to 64 and then to $3,899 when 65 and over. Endo has recovered nicely from a swoon in October and is still cheap at around $24 a share. It could probably get to $30 over the next year if it gets any kind of broad-market help at all.

Disclosure: We may own ENDP at any time.

Low Mortgage Rates to the Rescue

Trend: Borrowers with adjustable rate mortgages may get a pleasant surprise in 2009 – lower interest rates. Fewer foreclosures and lower mortgage rates could moderate the effects of the recession.

John Mauldin at Thoughts from the Frontline describes the impact of deflation and the Fed policy stimulus on interest rates. Excerpts below.

Lower rates for adjustable rate mortgage resets in 2009 could be less destructive to home owners in financial trouble. 

Link: Thoughts from the Frontline

...deflation will be the primary force that must be dealt with, rather than inflation, before we are done with the current credit cycle....Because of my view about deflation, I have long held that, ultimately, interest rates on the US 30-year bond would fall below 3%.

The Fed has already committed to buying mortgages and consumer loan securities. In Ben Bernanke's famous "helicopter speech" in November of 2002, he stated that one of the ways the Fed could fight deflation would be to "move out the yield curve" and set target rates for longer-dated securities, like 2- or 3-year US notes. In the FOMC release, the Fed noted that they might indeed use that tool. That is one of the reasons interest rates are falling, as the market must sense that the Fed is prepared to do just that. This meeting simply put the market "on notice" that at some future meeting it is quite possible for them to set a target rate on longer-dated securities.

Remember that ARMs (Adjustable Rate Mortgage) reset problem I was writing about late last year? This includes all the alphabet of ARM mortgages, interest-rate-only mortgages, pay-option ARMs, etc. Resetting the rates has been a problem up until now, as the rates which are the usual base for the resetting have been high, forcing mortgagees to pay a much higher monthly mortgage when the rates reset. However, given the current environment, that may no longer be a problem in the near future.

The large majority of ARMs are linked to either 1-year LIBOR or 1-year Treasuries. We saw above that 1-year Treasuries are 0.39%, and 1-year LIBOR is 2.09. Both were at 4.5% in 2006. Those getting ready to reset in the near future are actually going to catch a break and see their payments go lower!

You can bet that between the Fed and the incoming administration they are going to pull out all the stops to get 30-year fixed-rate mortgages to drop along with the 10-year US bond, with which mortgages normally move in tandem. The spread is now as wide as I can remember, at well over 3%. Not all that long ago it was 1%. It is quite possible that we will see mortgage rates below 5% and approaching 4% in the next year, at least for conforming mortgages.

Is Market Sentiment Changing?

Trend: Optimism is starting to bubble up among market watchers as various recession remedies are emerging.

Steve Christ at Wealth Daily has 6 Reasons to be Bullish in 2009.

Link: The Stock Market Bottom

...not one of them is enough to turn it all around individually, taken together they add up to a stock market bottom.

They are:

1. The Fed Is Now All In

If you've heard it once, you've heard it a thousand times by now: You can't fight the Fed. And with the Fed's latest policy statement released on Tuesday, it is now clear to the markets that Helicopter Ben has finally arrived.

2. The Obama Stimulus Package

Agree with it or not, a giant-sized stimulus package is just weeks away. With the change in administration, an economic recovery plan will likely be the first thing out of the box.

In fact, just this morning President-elect Barack Obama announced he is putting together the groundwork for a giant economic stimulus package, possibly as high as $850 billion over the next two years. In truth, it could end up over $1 trillion.

The President-elect is promoting a recovery plan that would feature spending on infrastructure projects, renewable energy, renovating schools, and technology spending.

There also could be some form of tax relief with tax cuts aimed at middle- and lower-income taxpayers, according to the Obama team.

The result is an economic money bomb that, when combined with the Fed's actions, should be enough to kick start the economy in 2009. 

3. Mortgage Rates Are Falling

How Bad is the Current Bear Market?

Trend: The current bear market is a bad one thus far – unless the bottom has been hit.

Link: dshort.com

The 10 best stocks for 2009

Trend: Buying safe stocks that pay dividends that will benefit from long-term global trends makes sense in the current environment.

Jim Jubak at MSN Money picks 10 stocks for 2009, based on safety and exposure to long-term trends. Excerpts below.

The 10 best stocks for 2009 - MSN Money.

First, these stocks offer ... safety, a modest dividend return of at least 2% to 4% and some upside leverage if the global economy delivers a positive growth surprise.

And second, they offer what I'd like to see for later: exposure to the most timely of the 10 long-term macro-investing trends....

The 5 best stocks for the first half of 2009

• Deere (DE), a farm machine producer that tracks the price of agricultural commodities. Yield: 3.1%.
  Enbridge (ENB), a natural-gas and oil pipeline company that has a 3.8% yield.
  ExxonMobil (XOM), the world's best integrated oil company for the current environment. With a yield of 2%, these shares just make my cut.

• Flowserve (FLS). Can you say infrastructure? It makes pumps and valves for moving everything from water to oil and has a yield of 2%.

• Rayonier (RYN), a producer of wood products and an owner of timberland. Yield: 7.2%.

 

The 5 best stocks for the second half of 2009

Scott Adams and Dogbert on Investing in CDOs

Link: Financial Markets Explained by Scott Adams

Think of financial theory as a stool. The stool is supported by three legs, or truisms.

• History always repeats.
• Past performance is no indication of future returns.
• Asshats are trying to steal your money.

These three truisms can explain any financial phenomenon. For example, if your financial advisor suggests that you invest in a market bubble that is about to burst, he will explain that the past is no indication of future results. Just because a Price/Earnings ratio of 45 has never been sustainable in the past doesn't mean it won't be perfectly safe in the future.

And when the bubble bursts and you lose half of your money, your advisor will explain it's because history always repeats. In other words, he's an asshat trying to steal your money.

This stool also explains the housing situation. Financial experts knew that making loans to hobos had never been a good idea in the past. On the other hand, past performance is no indication of future returns. Maybe this time would be different. Then history repeated and asshats stole your money. As a bonus, they even stole each other's money this time. You have to admire their thoroughness.

One last thing you need to know: People who say it is a good time to invest are called bulls. The bulls are at the center of all financial problems.

In summary, if you want to understand financial markets find a bull and look at his stool.

Recession Investment Opportunities

Trend: Companies that prosper in lean times with huge cash hoards are the best investments in a recession.

John Train, author and chairman of Montrose Advisors with 50 years of Wall Street experience, offers some investing advice in Fortune magazine. Excerpts below.

Link: 8 really, really scary predictions - John Train (6) - FORTUNE.

Investment opportunity is the difference between the reality and the perception. And since many equities are priced as though a depression might be on the way, many of them are attractively priced.

One approach I am comfortable with is owning shares in wonderful businesses that do well in all circumstances - Johnson & Johnson and the like. They rarely fly out of the park, but provide long, steady gains that will get you where you want to go. They often have huge cash hoards, e.g., Cisco, Apple, Microsoft, and Berkshire Hathaway, whose war chests exceed $20 billion. Or Hewlett-Packard, Google, Intel, or IBM, all in the $10 billion league. Such companies can take advantage of a weak market just as private investors would, with the difference that they know very well how much to pay for what fits their product line.

In the present environment I favor companies that can prosper in the lean years ahead. So, not Saks, but Wal-Mart; not Neiman Marcus, but Dollar General. Or specialists, such as Fastenal, Monsanto, or Schlumberger.

And when should you buy? In or near what I call the Time of Deepest Gloom, if you can spot it.