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Keith Fitz-Gerald of Money Morning shares his favorites and not-so-favorite plays to watch this year.

Nancy Zambell: Right now the market, as you know, is floating around 14,000. What do you think is going to be the next big thing?

Keith Fitz-Gerald: Nancy, it's very interesting to see the market run like it is, given the underlying fundamental situation in our economy right now. We still have debt problems. We still have just squeaked by the fiscal cliff. Congress is a wreck.

There is no adult supervision in Washington, so there are plenty of reasons to be concerned. I think that whenever the markets get toppish and long in the tooth like they are today, you want to make a conscious shift as an investor, from what the world wants to what the world needs. The reason to do that is twofold:

  • No. 1, I think that you want to build an upside because if the markets continue to run, you want to grab a piece of that.
  • But, at the same time, you want to begin very consciously building in defensive positions, on the assumption that something could reverse unexpectedly.

And the market is overdue for a correction. If we get one, changing to what the world needs versus what it wants, gives you a defensible position.

One of my favorites right now, for example, is in the energy sector. That's clearly something the world needs. The world's growth is continuing in every industry. So never mind the headlines, the fact of the matter is oil is in demand.

Nancy Zambell: Especially in the emerging countries, right?

Keith Fitz-Gerald: Absolutely. Not only that, but they have never known cheap energy. So if you look at a country like China, or much of the Pacific Rim, or Africa, those economies have a unique advantage that we haven't had historically, in that they are partially asset-backed and they're backed by oil.

So not only do they have growing demand that is outstripping our conservation efforts here, but they actually have the asset in the ground. And that gives them an advantage and makes them attractive and appealing for investment.

Nancy Zambell: What is your favorite pick in that area?

Keith Fitz-Gerald: Believe it or not, one of my favorite picks in that arena right now is right here in the United States. Because even if we're talking about emerging markets, I think we've got a choice here in Kinder Morgan Partners (KMP).

In the interest of full disclosure, I do own it. I don't have any investment banking relationships with them, but they're like a toll road for wealth.

The United States is critically short on pipelines. We have a lot of energy needs, and we need to move a huge amount of this stuff all over the place.

It's a simple business. You cram stuff in one end of the pipeline, you charge money for it, and you unpack it at the other end. They've got a 5.8% dividend, the last time I looked, which is a great compensation for the risk you take being in the marketplace.

Nancy Zambell: Interesting. Now, let's move on and talk about something that a lot of people have talked about, and that's technology. We've seen Apple come down from $700 to $450. Facebook made a big splash and then nothing. So what do you think about technology?

Keith Fitz-Gerald: It's interesting to me, because any time the market achieves an inflection point, this is another area that changes tremendously.

And the reason it changes is not so much that the market doesn't want to do stocks anymore, but it's the psychology of the investors that change. People feel like they're getting left at the station, so they start to look for those things that are media darlings.

I think many of the media darlings today—Intel (INTC), Microsoft (MSFT), Facebook (FB), Apple (AAPL)—those are all going to be dead money for years to come.

Now that's a very controversial view, so let me explain what I mean by that. I don't mean that the companies are bad; I don't necessarily mean that they're going to fail; but what I do see happening are better alternatives.

Microsoft, for example, has become the very IBM (IBM) that it set out to dethrone, when it was created. Intel is no longer a small, innovative company. Facebook is a behemoth that I think is worth $7.50. Social media is totally overrated in my book. I don't touch those things.

I'm looking at small innovative companies, particularly in cyber security space. One of my favorites is called Commtouch Software (CTCH). It's out of Israel, growing 30% a year, a cloud-based security solution.

They've got a who's-who client list, including Google (GOOG), Microsoft, McAfee (MFE), Netgear (NTGR), etc. I’ve recommended this. I have no ownership, but am looking to accumulate it.

Nancy Zambell: Okay, but what about bonds? Interest rates have done nothing at all this year. You're practically better off in a CD than anything else, unless you're buying stock with income. So what do you think about bonds?

Keith Fitz-Gerald: That's an interesting question. I've thought a lot about bonds here. I think we're near the end of that game. I'm leery of much more upside.

I don't think we can be without them as investors. We have to have them in our portfolios. So to that end, I think that the best thing investors can be doing right now is shortening up duration.

They want to get their maturities in a duration under three to five years, if they can, because that allows them to do two things. If rates really start to rise, they can build a bond ladder at higher rates as they're issued. And they're mitigating most of the risk that's associated with five-, ten-, and even 30-year bonds, which are going to get hammered when rates start to rise.

Nancy Zambell: So even though you really do need to have a little bit of your portfolio in fixed income, would you suggest a bond fund for the average investor?

Keith Fitz-Gerald: I've always been a fan of bond funds or ETFs, and the reason is that individual bonds can be problematic for the individual investor. They're easy to buy, but they're tough to trade.

And they're a very sophisticated market, thanks to all of the derivative trading that's going on. They have really taken on a life of their own, and I think better to leave that part to the professionals. Go with the bond fund.

Nancy Zambell: That sounds good. Now do you have a favorite trade for 2013?

Keith Fitz-Gerald: Oh, you bet I do, and it's one that's near and dear to my heart.

As you know, I've spent more than 20 years of my life closely involved with the Japanese markets. I live in Japan part of the year, so I'm intimately connected with that society. I think shorting the Japanese yen is the trade of the year. It's certainly the trade of the next few years.

Japan's got the worst demographics on the planet. It's GDP to debt relationship makes the Greeks look conservative, and that makes it actually look like Bernanke knows what he's doing with his printing presses.

I think the yen is going to fail, and is going to fail spectacularly, once the Japanese government can't hold on any longer. One of my favorite ways to play this is actually the ProShares Ultrashort Yen Fund (YCS). I don't have any ownership in that one personally but am short the yen using currency.

Related Reading:

http://www.moneyshow.com/trading/article/26/currency-30501/Goldilocks-Ends-_and_-Currency-Wars-Begin/

http://www.moneyshow.com/investing/article/1/tptp020713-30492/Plus-Signs-for-This-Driller/

http://www.moneyshow.com/investing/article/1/GURU-30490/The-Week-Ahead:-The-Good-the-Bad-or-the-Ugly/

Tickers Mentioned: Tickers: KMP, CTCH, INTC, MSFT, FB

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