Like Asia, European equities have gotten a lot cheaper compared to historical averages. Another simi...
Powell's Picks: Global Favorites
10/24/2014 10:00 am EST
Jim Powell specializes in assessing the potential impact of global developments in building long-term portfolios. Here, the editor of Global Changes & Opportunities Report looks at the world's hotspots and highlights a variety of top stock ideas.
Steven Halpern: Our guest today is Jim Powell, editor of Global Changes and Opportunities. How are you doing today, Jim?
Jim Powell: I’m fine. The market seems to be cooperating a little bit this morning and so we’re all pleased here.
Steven Halpern: Now, your expertise involves assessing the geopolitical landscape and how events around the world can impact investors here. Now I know it’s a lot to cover but perhaps you could provide our listeners with a brief overview of the most significant global events that you think need to be on their radar.
Jim Powell: Well, I think that the Ukraine situation still has the potential to blow up and become worse and it’s none too good right now. Obviously, we have a crisis occurring in the world—in the Middle East with Isis—and I must say that Isis has its sympathizers and imitators in Nigeria with Boko Haram and with the Taliban in—not only Afghanistan—but in Pakistan.
We also have the Ebola crisis, which has the potential anyway of becoming a big problem, even if it does not become a problem disease within the United States, it’s causing mayhem elsewhere.
We have a huge problem with the European economic slowdown and the possibility that they’re going to slip into a deflationary recession and, of course, we’ve also got the global economic slowdown occurring and a whole bunch of little brush fire wars everywhere that could turn into something worse, so yeah, we have a lot to keep our eyes on right now.
Steven Halpern: While interest rates are historically low, you point out that, looking ahead, inflation could become what you call a “clear and present danger.” Could you expand on that?
Jim Powell: Well, I’ll tell you, it’s interesting about inflation. The Feds money pump created inflation primarily in equity markets. This has been a Fed fueled bull market right from the very beginning, starting in early 2009, when all of the stimulus packages began.
So what we’re seeing now in price inflation and consumer prices is due to China. Wages in China have doubled over the past five years, their transportation costs are up.
Of course, China is a long way from the United States and all their other costs are up as well, and so we’re seeing a lot of consumer prices start to move up and people are beginning to notice it and are beginning to feel the pinch.
I just think that, one way or another, people are just going to have to start expecting to pay more for practically everything, with the possible exception of energy prices for the short-term over the next few years.
Steven Halpern: Now, you also warn that there’s an increasing possibility that a black swan or two may show up. Can you explain what you mean and how you would suggest investors protect themselves against that possibility?
Jim Powell: Well, getting back to the major problems that I mentioned a few minutes ago, I just think that we are being overly optimistic to think that none of these problems is going to turn into a crisis.
I think the odds are overwhelming in favor of the fact that one or more of these problems, some of which are related, are going to go critical and cause problems for us, not only in the markets, but in other ways.
So, as for how to protect yourself, I think this is a really good time for people to build up their cash so they can make use of bargains that come along, which will inevitably come along. Cash is also a good protection against all kinds of different crises, and when I say cash, I also include the regular folding money that you would keep at home, in case there is a situation where a financial panic or a financial crisis I should say, could make it difficult to use ATM machines or the banks.
I also think your emergency food, water, and medical supplies should be beefed up. Far from being paranoid, I think it’s just smart. I don’t feel like I’m being paranoid when I fasten my seatbelt in my car.
It’s just a smart thing to do and it’s the same thing today in today’s very troubled and unstable world to be able to take care of yourself without a lot of outside help for, at least, 30 days.
Steven Halpern: Now, despite these potential negatives that you highlight, you also recommend that investors still remain on board in terms of investing and, in fact, during the recent market selloff, you sent your subscribers a special bulletin reminding them that corrections are good for the market, could you explain your thinking?
Jim Powell: Well, corrections clear out a lot of dead wood that accumulates over a long period of time. They’re also very good for investors because they make quality stocks as well as mid-sized stocks more affordable and I just think that people who sell into a correction are almost always locking in their losses and preventing themselves from seeing higher gains down the road.
Now, we had a pretty sharp correction in January. We had a lesser one in August. A lot of people that I know got nervous because the markets have been doing so well for so long, they thought okay, this is it, and they bailed out and then the market turned around, regained all of the losses and went on to new highs.
I don’t think there is any reason to think that this one would be any different—even if it winds up being steeper and perhaps longer to bounce back—as we saw during the great recession from late 2007 to 2009.
A lot of people liquidated their retirement accounts at that time. They were just terrified and when the market recovered and went on to, really, many years of additional gains, they missed out on it.
I just think that if you’re investing in quality—I’m not talking about buying a lot of the little ONYX companies and the biotechs that aren’t making any money—but if you’re buying the big blue chips that are multi-national companies that actually help create economic conditions, they don’t just follow them, I think you want to use downturns as a way to load up on them at good prices.
Steven Halpern: Let’s look at some specific investment opportunities. Perhaps you would be kind enough to highlight some of the stock ideas that best fit the strategies that you discussed.
Jim Powell: Well, one fallen angel—that is always a good bet—are the big energy companies. Energy has never failed to bounce back and I think that that will be true now as well as in the future. I would be looking at ExxonMobil (XOM) if you’re looking for the very highest quality stock.
They’re down sharply for two reasons; number one, energy prices are down as everyone knows due to the amount of new oil and gas that has been found in the United States, and also, President Obama’s sanctions against Russia have been tightened recently and at least put on hold a major multi-billion dollar deal Exxon has with the Russian oil companies that are exploring in the Arctic, so I think Exxon is a really good bet.
If you want something a little smaller, but still a good quality, I like Core Labs (CLB). Core is an expert in getting, so called, depleted reserves, to give up another several % and several million dollars in most cases of additional oil that was thought to be trapped in the rocks and unrecoverable.
The market doesn’t like Core right now for all the reasons that I just stated and I think it’s a very good, long-term value.
You asked me a minute ago about geopolitical situations, I think America is, or rather Washington’s pivot to Asia, is going to create boom times for some of our defense stocks that build the big hardware that it takes to patrol that area.
It’s going to be a Navy show almost all the way, and General Dynamics (GD) has just received a contract to build ten new Virginia class submarines.
It’s got more contracts in the works for a lot more hardware that the Navy needs, and so I think General Dynamics is going to do well over the next few years.
And I think Raytheon (RTN) is to electronics and electronic warfare what General Dynamics is to ships. I think Raytheon will also do very well.
Steven Halpern: Well, thank you so much for taking the time today. We appreciate your insights.
Jim Powell: Always a pleasure, Steven.
Steven Halpern: Thank you.
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