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A Pessimist's Portfolio
04/01/2005 12:00 am EST
"I'm pessimistic about the state of our economy and the long-term direction of the US stock market," notes Jim Jubak. Here, the leading financial authority explains his cautionary outlook and highlights some of the areas he still considers attractive for a "Pessimist's Portfolio."
I think we're headed for trouble.
I believe that the huge US trade deficit matters. The money we owe to overseas
investors is a growing tax on our economy that, over time, will
lower our growth rate, raise interest rates, fuel inflation, and take a bite out
of our living standards. None of that will be good for the stock and bond
markets. We could be looking at a replay of the stagnant 1970s, when, in real
terms, for a decade, investors in both stocks and bonds lost money.
"On the other hand, the world didn't come to an end in the 1970s and I don't see it ending in the next decade, either. And while most investors didn't, you could have made money during that tough decade if you owned the right assets. During the decade, small-company stocks had an annual compounded rate of 11.5%. Thus, with the right portfolio an investor should be able to make money even if the markets in general go nowhere."
Here, we share a sampling of some the stocks he suggests as part of a longer-term Pessimist's Portfolio:
"If I could pick one sector to overweight now and for the rest of the decade, it would be energy. The huge populations in a developing India and China don't have to increase their energy use by much to keep global demand tight and prices moving upward. And since oil, which is priced in dollars, will keep climbing in price as the dollar falls, the commodity is a natural hedge against a weak dollar. My picks right now would be BP (BP NYSE) because with its development projects in Russia and the Gulf of Mexico, it looks set to increase its recoverable reserves faster than it pumps them; Canadian Natural Resource (CNQ NYSE), because with oil above $40 a barrel the company's huge oil sands deposits become very profitable to develop despite higher costs; and Talisman Energy (TLM NYSE) because this relatively small energy company has promising projects in the neighborhood of the big energy growth markets of China and India.
"A weaker dollar and rising living standards in the rapidly developing economies of Asia and China are likely to bring boom times for US producers of agricultural commodities. My suggestions here are Corn Products International (CPO NYSE), because a weak dollar will help the company increase the world's appetite for corn sweeteners, and Smithfield Foods (SFD NYSE), because while this company's factory farms are a huge environmental problem in states such as North Carolina, Smithfield Foods' integrated operation can take a pig (and increasingly a cow) from animal to prepared chops more efficiently than just about anyone else in the world.
"Another grown-in-the-US commodity faces a huge surge in demand thanks to the developing economies of China and India. As incomes increase, people consume more paper. And a falling dollar will give US timber the edge on price, and over the next decade the unsustainable mining of tropical rainforests will gradually reduce timber supplies. Stocks I like in this sector include Rayonier (RYN NYSE) and Plum Creek Timber (PCL NYSE). Why these two? Because of their real-estate kicker, which provides extra profits as these timber companies sell some of their land for residential development."
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