Barry Ritholtz posted an article from Gary Shilling called 2010 Investment Strategies: Six Areas to Buy, 11 Areas to Sell. I thought I would weigh in on the six and 11, some of which I agree with and some I do not.
First thing to buy, according to Schilling is long term bonds. For anyone inclined to trade bonds then sure, if you see a trade to make go for it but for investors who do not view their bond portfolios as a place to add volatility then I want no part of long term bonds. Forgetting the economic situation for a moment, rates are very low historically which means prices are very high. Obviously buying high is usually a bad idea. Then layer on the economic situation which screams for higher rates at some point and it seems like a risky proposition.
Number two to buy on his list is income producing securities. This seems to be any type of asset class but he talks most about high yielding stocks. Favoring high yielding stocks is usually a good idea. One point I made ages ago and just made it again to a client the other day is that dividends are not always high on the priority list. In years where the market goes up or down a lot getting an extra 200 basis points in dividends doesn’t necessarily help out. But just about every other time it does. After two years in a row with huge moves paying more attention to yield is probably a good idea. Paying attention is not the same as chasing.
Number three was to buy staples stocks. Staples do well on a relative basis in most market environments except up a lot. The sector did well in 2008 and lagged in 2009.
Number four was to buy small luxuries. This appears to mean low priced discretionary items like maybe a tchotchke of some sort but not expensive discretionary items. Is the Franklin Mint a public company (humor attempt)? There are stocks in this space but I have to say I have no interest in this one.
Next up to buy is buy the US dollar. He makes his case, you either agree or you don’t. I have said I cannot make a fundamental case for the dollar but I realize that at any time the dollar can go up a lot for any reason or even for no reason. I believe foreign is where it’s at and so will lag any time the dollar moves up in a meaningful way.
Last on the buy list is buy eurodollar futures. This is not the euro the way he means it. This is as an interest rate bet. This one is beyond the scope of what I do. If this is within your wheelhouse then presumably you already know how to access this market and have an opinion about doing the trade he talks about.
First up to sell is US stocks in general. He does not give a price target for the S&P 500 but does give a 2010 earnings estimate of $50 for operating earnings. What PE do you think should the SPX should have? If you say 15 then the SPX target would be 750. If you think 20 then the target is 1000. He doesn’t say in this post and I am not a fan of this form of targeting because the market can easily appear cheap or expensive for long periods of time. I have said I think the SPX will be down 10% for the year which is down a little, so not something I think needs to be avoided unless it involves a breach of the 200 DMA.
Second to sell is homebuilder stocks. I’ve never understood the supply and demand dynamics in this space. When I first moved to Phoenix in 1990 I could not understand who was buying all the new homes I was seeing built. This was not predictive of what was to come, we’re talking 1990, but I never understood it so I left the group alone. No one can understand every nook of the stock market.
Third to sell is selected big ticket discretionary. This is tough. I think it hinges on whether or not consumers get religion about debt and savings. Just because we should be more frugal does not mean we will be. I’m not willing to go long any big ticket discretionary stocks as individual holdings but we do have an ETF and some Nike which is probably more akin to the small luxury that Shilling would buy.
Next to sell is banks and other financial institutions. I am on board here. We own foreign banks (not from Europe), a publicly traded exchange and last week we bought an index provider to increase our sector exposure but we did so without domestic banks. If this was the worst crisis since…how can there not be another shoe to drop? Clearly there would be more harm to being long and wrong than accessing the sector in other ways.
The fifth thing to sell seems to be the same as the fourth; consumer lenders. Nothing has changed since I wrote that last paragraph.
Next item for sale is Many Low and Old Tech Capital Equipment Producers. I recently added American Tower. In my opinion tech has not been the same since the bubble burst ten years ago. I’ve said many times that the internet, not the stocks but the net itself, has exceeded the hype. Clearly people have made a lot of money in stocks like Apple and RIMM. We know a lot about the products. There is also a valid argument for buying the commoditized part of the sector like with the iShares Taiwan Fund (EWT)–don’t own that one BTW.
Next he advises selling your home right away if you want to sell. He is not saying sell he is saying get cracking now if you want to sell as he expects prices to go down before they go up. In another bullet pointed item for sale should be commercial real estate.
He goes on to say sell junk bonds. We talked about this yesterday, they are up a lot. They could keep going but, again, they are up a lot.
Second to last is to sell most commodities. I would say it depends on how much you have in commodities and why you own them. If you simply speculated on commodities and have made a lot of money then cutting back is probably a good suggestion. If you have a little exposure for diversification then selling may not be a good idea. No matter where gold is today, if something horrible happens tomorrow what do you think gold will do?
The last one is Developing Country Stocks and Bonds. Read what he says, it is a cogent thought, but I disagree. I’ve written my thoughts on why I believe in this space hundreds of times. I can’t imagine you don’t have a sense of the bull case for emerging markets. Hopefully what Shilling says is not completely new to you either. There have been and will be times where emerging markets go down fast and hard. It goes with the territory. This is why I don’t want 25% in the space but do absolutely believe some exposure will be crucial in this decade as it was in the last decade.