What to Sell If You Think It's a Bear

03/11/2010 12:22 pm EST

Focus: MARKETS

Gary Shilling

Columnist, Forbes

Gary Shilling, editor of INSIGHT, says we're in for years of deflation and bear markets, and he tells investors what they shouldn't be holding.

(Last month, Gary Shilling laid out some sectors and asset classes that would do well in a bear market. Here are some he thinks will be the losers-Editor.)

The slow growth and deflation I foresee in the years ahead portend a secular bear market for US and many foreign equities.

In a climate of slow economic growth and deflation in the next decade or so, [here are some] investment sectors to sell or avoid.

1. Sell big-ticket consumer discretionary purchases such as airlines, cruise lines, resorts, upscale retailers, etc. As consumers persist in their saving spree, they'll curtail spending on expensive postponeable items, [and] as widespread price declines develop in deflation, buyers will wait for still lower prices.

2. Sell companies with below-average revenue growth, high fixed costs, and big debt. This is a lethal combination in an era of slow growth and deflation.

3. Sell or avoid many low- and old-tech capital equipment producers. Chronic excess capacity is likely in the years ahead, and when operating rates are low, producers don't need more capacity. And demand for equipment is much more volatile than that for its users' products.

4. Sell or avoid banks and similar financial institutions. Large banks are now retreating from the profitable but risky businesses beyond traditional spread lending. Their earnings [may also be] squeezed by increased regulation and higher capital requirements.

5. Sell or avoid credit card and other consumer lenders. Consumer lenders had their heyday during the long consumer borrowing-and-spending spree. But consumers suddenly switched to a saving spree and started to pay down credit card and other debts.

6. Sell or avoid junk bonds. During the financial crisis, yields on junk bonds leaped to 19.3 percentage points over Treasuries as investors worried about widespread defaults among low-grade issues. [But] the default rate may [still] reach or exceed the previous peak in 2002 if the economy remains weak, suggesting major declines in junk bond prices.

7. Sell or avoid conventional home builders and their suppliers. Conventional homebuilding is likely to be depressed for years [because of] excess inventories, so prices will continue under pressure, especially after the homeowner tax credit expires.

8. Sell or avoid most commercial real estate. Excess capacity and big refinancing requirements will likely plague hotels, malls, warehouses, and office buildings in future years.

9. Sell or avoid commodities. Global excess supply will keep commodity prices under pressure. So, too, will the continuing realization by institutional and individual investors that commodities aren't an asset class, but speculation.

10. Sell or avoid developing country stocks and bonds. The Chinese and most other developing Asian countries nosedived as US consumers retrenched. Furthermore, as was made clear by the universal weakness in security markets in 2008, bond and stock markets around the world are highly correlated.

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