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Time for Investors to Wait and Watch
06/09/2010 9:27 am EST
Don't feel motivated to do any buying or selling? Join the club. But while conditions are less than tantalizing, focus on pruning your portfolio and preparing for new stocks.Many investors figure the smartest thing they can do now is nothing.
They've raised the cash they needed to raise, and they don't feel compelled to sell anything in a hurry. And they certainly don't feel a rush to buy anything.
Yep, doing nothing strikes many folks as the right thing to do.
I mostly agree.
The Jubak's Picks portfolio is about 35% in cash. As I wrote last week, I'm waiting for a buying opportunity in China (see this blog post), but that's not likely to occur until July or later. The US market is outperforming most of the world's markets, but that's not exactly a ringing endorsement.
Until the growth picture for the US economy gets a lot clearer—you did see the disappointing June 4 jobs number for May, right?—I don't feel a need to add to my US growth stock core in Jubak's Picks. The euro debt crisis will end someday, but someday looks like a way down the road. And now we've got a political crisis in Japan that may or may not be resolved by July's elections.
Nope, I'm not looking to make much in the way of buys or sells. But that doesn't mean I'm doing nothing.
It's time, in fact, to be hard at work on your watch list (mine is here) if you want to be ready when it is time to buy. Right now you should be pruning that list to make sure you're not fixated on buying stocks for the next market because they did well in the previous market. It's time to be scouting for new opportunities, stocks that seem especially attuned to the next market's sweet spots.
In this column, I'm going to take the pruning shears to Jim's Watch List and then identify some new growth that's worth your attention.
Looking for Your Pitch
Pruning and then replanting a watch list eventually gets very concrete and specific—you do need to identify individual stocks for the list—but it starts off general and speculative.
How to begin?
Exactly—or as exactly as you can, anyway—describe the kind of market you're watching for. Put a time period on it. And remember that you're looking ahead and not back.
NEXT: The Opportunities and Trends I'm Watching For|pagebreak|
Here's what I'm watching for: Sometime in the next six months or so, emerging markets will have resolved (at least for a while) the problems that are now worrying investors.
- China will have proved it can raise the capital its big banks need. The Agricultural Bank of China's initial public offering will prove that if the $30 billion share offering in Hong Kong and Shanghai goes as scheduled in July. (For more on that IPO as a stock market indicator for China, see this blog post.)
- Growth in China will have slowed enough so that the Beijing government can stop making threatening noises about ending speculation in the real estate market and clamping down on signs of inflation. Whether or not the dangers created by too much money flowing through China's economy are truly over, China's government will declare victory.
- Other developing economies will have reached the end of a series of interest rate increases designed to slow growth and head off inflation. Brazil's central bank will most likely finish its rate increases by the fall, for example. India is on a similar schedule.
- The end of growth fears in China and interest rate increases in developing economies will have removed the major internal downward pressure on stock prices in those markets.
At the same time:
- Europe and Japan won't have solved their long-range economic problems. Growth in those developed economies will continue to lag that of even the United States. But the euro debt crisis will have gone from red hot to a simmer. Investors won't be worried that every bank in Europe is going to fail.
- US economic growth will be strong enough to revive fears of interest rate increases from the Federal Reserve for 2011 but not strong enough to quickly lower unemployment or to give Washington politicians any easy way to reduce the budget deficit. With partisan gridlock increasing with every month we get closer to the 2012 presidential race (especially if the Republicans win a significant number of House and Senate seats this November), overseas financial markets will start worrying about the dollar again. Not enough to reverse the dollar's climb against the euro, but enough to keep the dollar from picking up more ground.
Summarizing, by the end of 2010, I'll want to own more emerging market stocks than I do now and more of the commodity-related stocks that rally when worries about growth in China, India, Brazil, and the rest of the gang disappear. I won't turn up my nose at a bargain in a European or Japanese stock, but those markets are likely to face strong headwinds. The best buys in Europe, the biggest bargains, will be bank stocks because they're so depressed now.
US companies that can take advantage of the return of optimism to developing economies will do well. Purely domestic US companies are likely to be less attractive as the US stock market loses its distinction as the best-performing stock market, relatively, in the world. US bank stocks are likely to outperform the US stock market as a whole as fears from the euro debt crisis recede and as investors know exactly how far Congress will go in restricting the banking industry.
At least that's the way global stock markets look to me now.
NEXT: See the Stocks I'm Dumping and New Ones I'm Watching|pagebreak|
No More Playing It Safe
So let's prune my watch list with that in mind.
In the first whack, let's get rid of the safe emerging market stocks. These were attractive when I was looking for safer picks in these markets—safer because of dividends or a history of steady cash flows—but now that I'm planning buys that will take off as worries about interest rates and economic growth recede, I want less safety and more risk. I think some of these are still good choices for my dividend income portfolio, especially because emerging market stocks are starting to show surprisingly high dividends (see this column), but for investors looking for gains from capital appreciation, I think riskier commodity, bank, and export growth plays offer more upside.
Out with China dividend play Jiangsu Expressway (OTC: JEXYY).
Out with US domestic companies such as retailer Wal-Mart Stores (NYSE: WMT).
Out with long-term growth or relatively safe financial plays such as MetLife (NYSE: MET), Standard Chartered (OTC: SCBFF), and Standard Bank Group (OTC: SBGOY). The bank stocks that will bounce back fastest once the euro debt crisis has turned into the euro debt simmering worry are those that have been crushed most—without going under—in the worst days of the crisis.
Out with those ideas that just don't work anymore—and perhaps never did. In that group, I'd put Prudential (NYSE: PUK), which I added to the list because I liked its acquisition of American International Group's (NYSE: AIG) Asia business—but the acquisition was never completed. I'd include ITC (NYSE: ITC), a pure play on the need for more and better electric transmission lines, which just doesn't look like it will play out in the current thinking about an energy bill. It doesn't look like a good time to be trying to add oil company Apache (NYSE: APA) to the portfolio. China Medical Technologies (Nasdaq: CMED) has underperformed even considering the bear market for Chinese stocks in general. And finally, I'd include Polypore International (NYSE: PPO) on valuation. While I've been waiting for a good time to buy, the stock has gone up 80%.
And what would I add given my view on the future of global markets over the next 12 to 18 months?
I'd add bank stocks such as JPMorgan Chase (NYSE: JPM) and Banco Santander (NYSE: STD), which have been crushed in the selloff of bank stocks, but are fundamentally sound and stand to pick up share from competitors. (See this post on US bank stocks for more on JPMorgan Chase and this recent update on my dividend income portfolio for more on Banco Santander.)
I'd add a Brazilian stock such as sugar-cane-to-ethanol powerhouse Cosan (NYSE: CZZ), as I'm expecting interest rate hikes in Brazil to end later this year.
Among global commodity stocks, I'd add Freeport McMoRan Copper & Gold (NYSE: FCX) because copper prices track economic growth, especially economic growth in China, so closely, and mining-equipment-maker Joy Global (Nasdaq: JOYG).
This isn't the end of my watch list planting for new growth. But I'm going to stop here. After a market correction, watch lists have a tendency to include just those stocks that an investor had thought to buy before the correction, but were too expensive then.
To avoid that trap, you need to wipe the slate clean and go looking for new stock ideas, not simply those stocks that are cheaper now than they had been.
In my June 10 column, I'll show you one way that I use to generate new ideas and add three blank-slate ideas to my watch list.
At the time of publication, Jim Jubak owned shares of the following companies mentioned in this column: Mindray Medical International, Standard Chartered, Suntech Power, and Telkom Indonesia.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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