12 Investing Themes: What’s Hot and What’s Not

06/10/2011 7:00 am EST

Focus: MARKETS

Gary Shilling

Columnist, Forbes

Bonds, dividends, and certain real-estate sectors look solid, while commodities and single-family housing should be long gone from your portfolio, writes Gary Shilling of INSIGHT.

The turmoil in the Middle East has introduced considerable volatility into security markets, and threatens global oil suppliers and the worldwide economic recovery.

So have the earthquake and tsunami in Japan, the prospective hard landing in China, the continuing sovereign debt crisis in the Eurozone, and the renewed drop in US house prices.

In this environment, we're investing cautiously.

Treasury Bonds (favorable)
Treasuries have rallied as a safe haven in a sea of trouble. Slowing growth and looming deflation will also favor Treasuries. These are available through security brokers, banks,and www.treasurydirect.gov, as well as via ETFs and futures contracts.

Income-Producing Stocks (favorable)
Included are utilities, drugs, and telecoms with high, safe, and rising dividends.

US Dollar vs. Euro and Yen, and the Dollar Index (favorable)
The Eurozone remains in deep trouble, and the greenback is the world's safe haven. The international intervention against the yen on March 18 may have marked its high-water mark.

Implement this theme with futures contracts and ETFs on the dollar index, as well as put options.

US Dollar vs. Australia Dollar (favorable)
Australia has become a Chinese colony, as the island continent's minerals are dug up and sent to China. And China is in the "stop" phase of her stop-go economic policy.

Furthermore, Australia's private economy has suffered declining growth for years, and now is actually shrinking.

Eurodollar Futures (favorable)
This theme depends on the Fed continuing to keep rates flat in the face of an uncertain economy, but this is becoming less certain beyond late 2011.

Big moves in eurodollar prices are small in absolute terms, so an investor needs the leverage of futures contracts to make meaningful money. Calls on the futures are also available.

Rental Apartments (favorable)
These are gaining favor by those who can't afford home ownership, and are discouraged by falling house prices. REIT prices seem overblown, but direct ownership of rental apartments may still be attractive.

North American Energy (favorable)
As a nation, the US has decided to reduce dependence on imported energy from high-risk areas such as Venezuela, Africa, Russia and—especially—the Middle East. We like conventional energy investments including natural gas.

New nuclear facilities may be postponed in the wake of the earthquake and tsunami in Japan. Renewable energy depends heavily on unpredictable government subsidies. Implement with futures, ETFs and individual stocks.

Medical Office Buildings (favorable)
The aging postwar babies, the 2010 health care law, and the migration of physicians from private practice to hospital employment will promote robust, steady growth in this real-estate sector. Implement with REITs and direct ownership.

Residential Housing (unfavorable)
Sell your house, second home, or investment single-family houses yesterday, if you plan to do so any time soon. Excess inventories are likely to push prices down another 20%. Also sell homebuilders, in view of the deteriorating housing outlook.

Developing Country Stocks (unfavorable)
China is likely to have a hard landing. Implement with ETFs on China-related stocks.

Commodities (unfavorable)
The commodity bubble may be beginning to break, as others join us in thinking about a hard landing in China, falling US house prices, and troubles in Japan and the Eurozone. Oil may be the exception due to Middle East uncertainty.

Implement with stocks, ETFs, and futures. We're short copper and sugar.

Sell Major and Regional US Banks (new theme)
Major banks wrestle with regulators over bad mortgages, and the prospect of another 20% fall in house prices means more woes.

Regional banks suffer from weak loan demand, and will be negatively affected by slower economic growth, if not another recession. Implement this strategy with ETFs.

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