Sectors

[blygh]

I have read that 50% of a stock's appreciation (or depreciation) is attributable to the sector it is in. I tend to pick the second best performer in the best sectors. I short the second worst performers in the underperforming sectors. I have been positive on commodities for a while as people convert questionable dollars to harder assets. I have been short real estate. I was wondering what other folks think the best performing sectors and worst performing sectors will be in 2010 -

Blygh

[ira85]

Though not necessarily sectors, three investment ideas to consider: a natural gas rebound, short U.S. Treasuries, and long emerging markets.

Natural Gas. Look at a chart of UNG, an ETF that tracks the price of natural gas. UNG went from over 60 to under 10 since summer 2008. Last trade was $10.24. It’s still under it’s 100 and 200 day mva. Now overlay the chart of FCG, an ETF that tracks the stock of natural gas exploration and production companies. FCG went down like UNG until February 2009 and then turned up ahead of the broad market. FCG has been going up for the past year while UNG has kept going down. Something’s gotta give. The stock of natural gas producing companies can’t keep going up while the commodity they produce keeps going down. Oil, gasoline, and coal all had rebounds in 2009. Clean burning, efficient, and now cheap, natural gas seems due for a rebound. An investment in UNG would seem to have limited downside risk from here. For a more sophisticated investor than me, perhaps a strategy of going long UNG and short FCG could limit risk further.

The next two are long term trends I expect to see play out over the next ten years. Maybe not in 2010, but eventually.

Short U.S. Treasuries. Interest rates fell dramatically from 1981 until recently. A huge once-in-a-lifetime move. It’s over. Can’t continue. Interest rates paid by U.S., treasuries are now low. With massive economic stimulus there is potential for inflation down the road. With massive deficits and no hope of balancing the budget, higher interest rates (eventually) seem a certainty. Bond prices have been held up in 2009 by defensive, fear driven buyers seeking a safe haven. Even as the stock market was enjoying a huge 2009 rebound investors were pulling money out of stock mutual funds and putting it into bond funds. Once they realize interest rates are going up and bond prices coming down, that flow of funds will reverse. Everyone knows there is huge risk in treasuries if/when foreign bond buyers lose confidence and stop buying our bonds. With essentially no chance for big capital gains in bonds and huge risk for bond prices to drop, shorting treasuries seems like a low risk, long-term strategy. Of course, a new wave of panic in the stock market would result in safe haven buying of bonds. But if that happens, I would consider it an opportunity for a low risk entry point for shorting long dated treasuries.

Emerging markets will continue to out-perform developed markets for the next 10 years, just like they have out-performed for the past 10 years. This is a popular idea and a lot has been written about it. Europe, Japan, and the U.S. have aging populations and stagnant population growth, Demographics and economic prospects favor growth in the emerging markets. I think it’s a very long term theme that will hold true for many years to come. -ira

[blygh]

Ira
A well reasoned tarding strategy - natural gas is i THINK good long term investment. I have held positions in pipe lines BWP and marine transport GNLG -of natural gas. It is not clear to me that the large supply will not lower prices - Shorting the exploration cos. is a rational move but as somebody once said - the market can be irrational longer than you can hold a position.

Treasuries - I cannot figure out why people will lend money to Uncle Sam and demand only 4.6% for 30 years.I think it might be fear of deflation - the productive capacity of the world is rising about 4-5% a year. Increased production with constant demand -> lower prices. There is just so much money out there looking for yield and every other country is trying to keep their currencies cheap to support exports and limit imports

I too like emerging markets - especially the brics - and now Africa (EZA) - I am slowly souring on eastern Europe but I still like Russia (national debt is only 5% of GDP)

[blygh]

My sector shorts (going long a short ETF) include SRS SMN EUM TWM
Blygh

[sd]

Just saw Ira's post on UNG ETF-
I had traded UNG several times, Bankedout had pointed out how it did not perform in concert with the commodity price. There was some discussion then, but it boils down to a daily rebalancing of the ETF price www.direxionshares.com/pdfs/Compounding_Article_ETFs.pdf.
Also, He pointed out that FCG -a nat gas etf, seems to trade positivly, while UNG- nat gas fund- can trade lower.
Compare the 2 of these on a weekly chart and you will be amazed- While both fell from mid 2008, FCG reversed and moved up 100% from it's lows, and has been uptrending since last march, while UNG continues lower.

There's a lot of publicity and promotion on moving to use more nat gas., it would seem logical as an investment theme one that couldn't go wrong- but UNG would not be the way to go.

Also:http://www.thestreet.com/story/10457663/4/the-perils-of-the-proshares-ultrashorts.html
www.stockpickr.com/view/answers/62893/
So, it makes one question which ETF's one can use for a long term position, and which are best used for a few days- Best to do some homework though! SD

[blygh]

Trying to figure out what is going on - does this have a ring of credibility 1) In the 1990s the market was driven by baby boomers in peak earnings years desperate to have savings and income flows to maintain life styles - now they are exiting the market and becoming risk averse - why else would anyone lenf the Fed Govt money for 30 years and only ask 4.17% interest ? 2) Remember supply side economics? - control inflation by increasing production to drive down prices - Now too much of a good thing - anything can be produced anywhere and it just about is. Third world competition to be the low cost producer - so many things have been commoditized (producers become price takers of the market price) that economic profits are impossible 3) Banks which are not getting their loans repaid are having trouble paying out pensions and annuities - they have little to lend out (although Obama is trying to recapitilize them) causing a slowdown in expansion. I think we are going the way of Japan (the Neikei was 39,000 in 1989 - today it is around 10,0000 - DEFLATION is the order of the day - so I am buying high dividend paying stocks REITs energy investment trusts stable utilities, Comments??

[bankedout]

I think we could easily see a Japan scenario here. By my estimation the US stock market is WAY overpriced. Although it seems as though value and price are no longer related in any meaningful way.

I would think in a true deflationary environment cash would be king since your buying power actually goes up over time. However if you can manage to earn a small return during that time, so much the better.

[ira85]

I take a different view of causality than blygh. Instead of an aging U.S. investor becoming risk averse resulting in stock declines, I think we have a fluid world market where investment capital goes where prospects are best. If Europe and the U.S. have huge public and private debt, aging populations, and low/no growth prospects, expected earnings are low and capital goes where the prospects are better, e.g. China, India, and Brazil. I think its economic fundamentals of high debt and low growth that spell problems for the U.S. economy and stock market.

I'm afraid bankedout is on to something comparing our situation to Japan. In the 1990's the Japanese were faced with an asset bubble bursting and real estate and stock prices collapsed. Japanese banks were holding billions in bad real estate loans. Government tried stimulus packages, infusions of capital, ultra-low interest rates, public works projects, etc. etc. And 20 years later they are still foundering. We are ten years into our secular bear market. Ten years from now we may be like Japan still stumbling around trying to find a way back to prosperity. And the Japanese weren't saddled with our astronomically expensive medical system caring for a wave of baby boomers, which will be a drag on the economy for many years to come. Instead of REITs, which have certainly been hot lately, I'm still expecting the real money to be made in emerging markets, not the U.S., Europe, and Japan.

[blygh]

Ira, my problem with the emerging markets is, "Who are they going to sell to?" - The US consumed an estimated 25% of the world's production - Europe probably took the same. With our two economies in debt up to our collective kesters, there must be a limit to the marginal propensity to consume. So the emerging markets have a shrinking customer base. Could they sell to each other? If they could establish trade, what would margins be? I suspect they will like like so many little Walmarts. Razor thin profit margins and thus dependent on high turnover. I have been in and out of the BRICs for some time . Except for oil and a few key commodities I cannot see sources of substantial profits - but I may be wrong

[ira85]

blych,
I saw recently that per capita healthcare spending in the U.S. is now over $5.500 annually. In China it's about $100. As a percentage of GDP it's almost nothing in Chiina. Where's the better opportunity for a healthcare business? I'm expecting emerging markets to make money by selling natural resources and manufactured goods. Then using that money for improving domestic standards of living. GM sold 4 times as many Buicks in China last year as they did in the U.S. With billions of people enjoying rising incomes, I see those markets as having greater domestic growth potential than us. It's been mostly export in the past, but now I think there's great potential for domestic growth.

[blygh]

I was just re-readng the above posts and was impressed with the insights expressed. I guess none of us expected the effects of quantitative easing - the restoration of trillions in liquidity thanks to the Fed's buying of assets, primarily MBSs.
Health care and natural gas still seem like good sectors to be in. Emerging markets not so much although I have made a few bucks getting in and out of India. I sell China at a Hang Sang of 23000 and buy it back at 22,0000. South America has been a disaster but may be bottomning (although one of my guiding maxims is - never try to pick s bottom). Travel and leisure stocks seem to be on a tear. TRIP, EXPE, PCLN DIS WYNN LVS CCL - this may reflect boomer-nomics - retiring baby boomers traveling more. Outside of that alternative energy (TAN FAN SCTY CSIQ FSLR VWDRY) are part of the portfolio.
Blygh

[blygh]

Sectors I am in now include railroads (Basket has UNP, KSU, GWR, CSX, NSC) . Railroad Equipment (WAB, RAIL, ARII, GBX, TRN). For energy ERX covers where I want to be. For Health care IHF covers providers and IBB covers biotech (tight stops on IBB - looks like bubble to me). TAN, FAN and GEX cover long term investments in solar. Still holding Canadian banks (RY, BMO, BNS, CM, NTIOF) and but lightening up on energy investment trusts (SBR, HGT, SJT, BPT - but that may be a mistake given energy stock performance).

Blygh