3 Sectors to Watch in the Short Term

07/19/2011 7:00 am EST

Focus: STOCKS

Robert Rikoon

Founder, The Rikoon Group, LLC

Natural gas, real estate, and alternative energy are three sectors showing strength, Rob Rikoon tells Kate Stalter in today’s interview. He also discusses why he’s avoiding China, and why income investors will have a tough time in the foreseeable future.

Kate Stalter: Today we are speaking with Rob Rikoon of the Rikoon Group in Santa Fe, New Mexico, and thank you very much for joining us today Rob.

Rob Rikoon: You’re very welcome.

Kate Stalter: I wanted to start out by asking about your take on the current market, and what you believe is important for an individual investor to know right now.

Rob Rikoon: My view is that the market is extremely dangerous at the current time, especially in the bond area. With interest rates being at historical lows, there is a frantic search on many investors’ part for higher yielding instruments than the very low returns that people are getting at banks, CDs, or even in traditional municipal and corporate bonds.

People are doing all kinds of weird things to try and earn income. Those things may work as long as the Fed is able to keep interest rates super low—but when that cat gets out of the bag, those investments are going to get slammed.

So, I think income investors are particularly at risk. Given the European situation, which is likely to get much worse even if we see quite a bit of window dressing that the problems have been addressed, the European equity markets, and by implication the Japanese and the US, will have a damper on them.

I think the US Treasury market will be strong, because people will continue to look for safety—any kind of safety. Even if we have real negative returns in US Treasuries, given their low interest rates and the high rate of inflation that I think people are experiencing.

So, individual investors are really quite challenged because traditional vehicles like mutual funds, especially, and bonds are finding no relief.

Kate Stalter: Given all that then, are there any sectors or global regions or asset classes that you do see as showing some strength at the moment?

Rob Rikoon: Sure. Sure there are always opportunities. The natural-gas sector, especially the transmission in the US, we think holds a lot of promise. Natural gases are at a low point and we always like to buy low.

Even if it doesn’t go up right away, I think patience is always important in investing regions that we like. We’re just now doing some international bond investing, especially countries whose deficits are nothing like Western Europe, the US, and Japan, because their bond markets have room for interest rates to come down, even if they haven’t yet because of the scramble for natural resources.

The energy markets, we think, are pretty fairly valued at the moment, but long term it’s hard to argue with the world’s increasing appetite for both energy commodities and food stuffs.

Kate Stalter: You mentioned quite a few areas that you believe are weak right now. You mentioned bonds specifically. Anything else you’d like to add that you believe individuals should avoid or sell at this time?

Rob Rikoon: Definitely. I am not a believer in banks. The banks in the developed world are essentially extensions of the government now, since 2007 and 2008 when they had to be bailed out.

Even though banks show incredible profits—like JPMorgan Chase (JPM) just announced very good earnings and they still have essentially a license to make money, just like the Fed has a license to print money—my belief is that extensions of the government are not long-term places for investors to make money. So we are avoiding the banks big-time.

People make money in high-end consumer goods. There’s a lot of money coming in to the US from Latin America for safety purposes, and there’s a lot of shopping going on in the high-end retailers, especially in places like Miami, Los Angeles, and New York.

But I tend to stay away from things that depend upon high discretionary spending. Same thing about these new Internet, kind of Facebook-hype jobs that are coming, where people are clamoring for pieces of social networking. It’s sort of similar to the Internet bubble we had about a decade ago.

Kate Stalter: Let’s talk specifically then, what are some of the specific investment vehicles that you are using these days to meet your clients’ objectives?

Rob Rikoon: The investment vehicles that we turn to? Some of them are real estate-based, especially rental property and in the residential area. There are some very good publicly traded vehicles that have apartment houses, especially in the Northeast and in California.

I think there are more and more people turning to renting, and we’re seeing that both on the younger part of the population and also the baby boomers who are retiring and sort of tired of trying to maintain large, energy-inefficient homes.

The alternative-energy area is something that many of our clients and we, ourselves, are quite interested in. It’s very difficult to make money, because the good companies get bought up by the industrial conglomerates.

There are some excellent solar and renewable electric battery companies that are starting to make money, given the increased interest in improving fuel efficiency. So, especially for socially responsible investors, that’s a good area.

I think I mentioned overseas bonds as being a good area. It’s important to look at the economies of those countries and the levels of corruption, how stable those markets are. For example, we stay away from China, but we like countries that are near China that have much more transparent markets than China does.

So, that’s actually going back to an area that should be sold or avoided, which is the Chinese equity market. I think their finances are probably in terrible shape—other than their huge trade surplus—but they throw money down the tubes. They make us look efficient, if you can believe that.

Kate Stalter: What are some of the regions near China that you believe would be better alternatives?

Rob Rikoon: Indonesia, Vietnam, Thailand, Australia...people that supply China with the resources that they’re using.

I’m not a big believer that China is a huge threat to US preeminence in technology or in the creative fields. I remember Japan being touted as being about to take over the world, and I think we see that kind of fear about China.

But I think our country, especially our large international companies, is going back to the question about what areas are good potential investments now—especially if the market comes down, if the news in Europe turns really ugly—US-based international companies that have high dividends is one of our specialty areas.

So we look for basic consumer-product companies, management companies, energy service companies. All of these that have dividends that make the bond returns look paltry.

For most of our clients who are looking for income, we’re turning to high-dividend , US-based international companies that are names that listeners would recognize.

Band-Aid companies, since I’m not allowed to say names, if you catch my drift here. And you know, foods, soups, trucks, and things like that, just the basic building blocks. Things that people will need no matter what the economic circumstances are.

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