Some analysts are making the case that it’s time to look outside the U.S. at stocks in non-U.S...
Look For Growth at Home
10/22/2012 8:30 am EST
There's a fair amount of risk still gripping most of the world, but there are some signals of growth in the US that investors can get in on now, says Michael Cuggino.
Gregg Early: I'm here with Michael Cuggino, president and portfolio manager of Permanent Portfolio Family of Funds. Michael, I wanted to start out asking you about where you see the market's heading into the end of this year. You tend to have a broad view of what's going on out there. Do you see this recovery continuing?
Michael Cuggino: Well, the recovery has been anemic. I think the latest GDP numbers were revised down to like 1.3%, so that's less than the previous quarter.
If anything, whatever growth we have appears to be slowing down. The question is whether that trend is going to continue into a point of becoming another slowdown or recession, or whether it was just a break in a longer-term growth pattern.
I think there's a lot of fog that needs to be cleared up in the next couple of months here with respect to where we're going. You've got the fiscal cliff issue, you've got the presidential and Congressional elections, you've got continued financial and operational economic issues in Europe, and you have our own anemic economic performance, high unemployment, and the impact of the Fed's recent QE3 issue.
My sense is that we're going to have a period of uncertainty where we bounce along a little bit, maybe growing a little bit, but not substantially. Maybe slowing down a little bit, but not quite being in a recession until some of these questions get answered.
In many cases, these are more structural-longer term-than short term, which means that regardless of election results, for example, you're not going to see a huge jump in economic performance or asset outperformance just because one candidate or series of candidates get elected versus another.
I think it's going to rely on more longer-term trends, structural changes or not, in our own economic situation as well as Europe's; the ultimate deal that's reached, if any, on the fiscal-cliff issues; and further economic growth worldwide as well as here in the States.
Gregg Early: Do you see precious metals making any moves? There seems to be a lot of talk about precious metals as a hedge here, as an inflation hedge, because QE3's kicked in.
There's been a rally in gold. I know that the big boys, I think Buffett and Gates and Soros, have been buying lots of physical silver. Is that simply as a hedge, or does it look like the precious metals are moving up on their own merit?
Michael Cuggino: We invest in both gold and silver in our Permanent Portfolio, and with respect to gold, it's an insurance policy, it's an alternative currency, it's a hedge against the disruption in the financial and economic systems around the world.|pagebreak|
Silver has some of those qualities, but also is more of a cyclical industrial metal, so it's more levered to economic growth worldwide. It's also less available, so there's a little bit more leverage in terms of price with respect to supplies.
I think like any commodity, you've got three factors to look at with precious metals: Supply/demand, monetary policy, and event-driven risk. In all three of those instances, the conditions are favorable for precious metals, particularly gold, in that you have the supply/demand characteristic.
There isn't a whole lot of new supply coming on market. You've got demand increasing from an investment standpoint as well as a retail standpoint-personal consumption. This is true around the world, not only here in the States, but even more-even to a larger degree-in Asia and some of the world's more growing economies with more disposable income.
You have negative real short-term interest rates after inflation, which has traditionally been a bullish sign for gold. And you have a tremendous amount of liquidity being printed and created by the world's central banks. So obviously here with the Fed, but also in Europe and Japan, among other places, to fund some of these social programs and alleviate pressures on those programs caused by budget deficits and slow economic activity.
The resultant mix, is that I would expect a continued increase in prices for assets like gold and silver. It will be a volatile ride of course-it always is with these assets-but I would expect the volatility to continue to trend to the upside.
Gregg Early: Are there any particular stocks or ETFs you like at this point, in these sectors or in other sectors?
Michael Cuggino: We're believers in the worldwide growth story being a long-term trend. I think there's no question it's hiccupping to a certain degree right now. But in a real longer term, multi-year business cycle type of scenario, we think growth is the norm.
We lever it in our equity positions, both in the Permanent Portfolio, as well as our Aggressive Growth Portfolio, to those companies that are geared toward global growth. US companies that are geared toward global growth, that have very good earnings models, supportable dividends, and more volatile names, I guess.
Also, more higher-beta names that are really exposed to a growth-oriented economic situation versus a contracting one in which you'd be invested in defensives and utilities and the like. So areas like energy, like refining, like industrial metals, agriculture, US manufacturing, technology, financial services; to a lesser degree bio-pharmaceuticals, transportation stocks.
Those are all areas that we think are going to be long-term growth industries in areas that we are currently exposed in. Real Estate Investment Trusts would be another one.
Gregg Early: Do you like the railroads? Does that story interest you?
Michael Cuggino: Yes, railroads are a good example. One of the names that we own is Kansas City Southern (KSU). It's a small railroad based here in the US, primarily runs down the spine of the United States, and it has entry points to the US from both Canada and Mexico.
It's definitely a beneficiary of NAFTA and trade in the Americas, and it's been a very good performer in the last year or two as a result. It's less exposed to the slowdowns. And it's primarily Americas-driven, less exposed to those issues in Europe and possibly slowdowns in Asia. It's been a good performer for us.
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