First thing to buy, according to Schilling is long term bonds. For anyone inclined to trade bonds then sure, if you see a trade to make go for it but for investors who do not view their bond portfolios as a place to add volatility then I want no part of long term bonds. Forgetting the economic situation for a moment, rates are very low historically which means prices are very high. Obviously buying high is usually a bad idea. Then layer on the economic situation which screams for higher rates at some point and it seems like a risky proposition.
Number two to buy on his list is income producing securities. This seems to be any type of asset class but he talks most about high yielding stocks. Favoring high yielding stocks is usually a good idea. One point I made ages ago and just made it again to a client the other day is that dividends are not always high on the priority list. In years where the market goes up or down a lot getting an extra 200 basis points in dividends doesn't necessarily help out. But just about every other time it does. After two years in a row with huge moves paying more attention to yield is probably a good idea. Paying attention is not the same as chasing.
Number three was to buy staples stocks. Staples do well on a relative basis in most market environments except up a lot. The sector did well in 2008 and lagged in 2009.
Number four was to buy small luxuries. This appears to mean low priced discretionary items like maybe a tchotchke of some sort but not expensive discretionary items. Is the Franklin Mint a public company (humor attempt)? There are stocks in this space but I have to say I have no interest in this one.
Next up to buy is buy the US dollar. He makes his case, you either agree or you don't. I have said I cannot make a fundamental case for the dollar but I realize that at any time the dollar can go up a lot for any reason or even for no reason. I believe foreign is where it's at and so will lag any time the dollar moves up in a meaningful way.
Last on the buy list is buy eurodollar futures. This is not the euro the way he means it. This is as an interest rate bet. This one is beyond the scope of what I do. If this is within your wheelhouse then presumably you already know how to access this market and have an opinion about doing the trade he talks about.First up to sell is US stocks in general. He does not give a price target for the S&P 500 but does give a 2010 earnings estimate of $50 for operating earnings. What PE do you think should the SPX should have? If you say 15 then the SPX target would be 750. If you think 20 then the target is 1000. He doesn't say in this post and I am not a fan of this form of targeting because the market can easily appear cheap or expensive for long periods of time. I have said I think the SPX will be down 10% for the year which is down a little, so not something I think needs to be avoided unless it involves a breach of the 200 DMA.
Second to sell is homebuilder stocks. I've never understood the supply and demand dynamics in this space. When I first moved to Phoenix in 1990 I could not understand who was buying all the new homes I was seeing built. This was not predictive of what was to come, we're talking 1990, but I never understood it so I left the group alone. No one can understand every nook of the stock market.
Third to sell is selected big ticket discretionary. This is tough. I think it hinges on whether or not consumers get religion about debt and savings. Just because we should be more frugal does not mean we will be. I'm not willing to go long any big ticket discretionary stocks as individual holdings but we do have an ETF and some Nike which is probably more akin to the small luxury that Shilling would buy.
Next to sell is banks and other financial institutions. I am on board here. We own foreign banks (not from Europe), a publicly traded exchange and last week we bought an index provider to increase our sector exposure but we did so without domestic banks. If this was the worst crisis since...how can there not be another shoe to drop? Clearly there would be more harm to being long and wrong than accessing the sector in other ways.
The fifth thing to sell seems to be the same as the fourth; consumer lenders. Nothing has changed since I wrote that last paragraph.
Next item for sale is Many Low and Old Tech Capital Equipment Producers. I recently added American Tower. In my opinion tech has not been the same since the bubble burst ten years ago. I've said many times that the internet, not the stocks but the net itself, has exceeded the hype. Clearly people have made a lot of money in stocks like Apple and RIMM. We know a lot about the products. There is also a valid argument for buying the commoditized part of the sector like with the iShares Taiwan Fund (EWT)--don't own that one BTW.
Next he advises selling your home right away if you want to sell. He is not saying sell he is saying get cracking now if you want to sell as he expects prices to go down before they go up. In another bullet pointed item for sale should be commercial real estate.
He goes on to say sell junk bonds. We talked about this yesterday, they are up a lot. They could keep going but, again, they are up a lot.
Second to last is to sell most commodities. I would say it depends on how much you have in commodities and why you own them. If you simply speculated on commodities and have made a lot of money then cutting back is probably a good suggestion. If you have a little exposure for diversification then selling may not be a good idea. No matter where gold is today, if something horrible happens tomorrow what do you think gold will do?
The last one is Developing Country Stocks and Bonds. Read what he says, it is a cogent thought, but I disagree. I've written my thoughts on why I believe in this space hundreds of times. I can't imagine you don't have a sense of the bull case for emerging markets. Hopefully what Shilling says is not completely new to you either. There have been and will be times where emerging markets go down fast and hard. It goes with the territory. This is why I don't want 25% in the space but do absolutely believe some exposure will be crucial in this decade as it was in the last decade.
24 comments:
Helpful and insightful post, Roger. Thank you.
FWIW, I don't find asset class or sector-level recommendations to be very helpful at this point in the recovery. There is money to be made if an investor is willing to do some objective, hard thinking and analysis, regardless of what the pundits think. American Tower is an excellent example.
Roger,
I read in today's WSJ that the demand for lithium in car batteries is expected to increase a staggering 90 fold by 2014. Other than SQM (which I already own), are you aware of any other ways to play the lithium market?
7:02, i think i agree. i have said a few times that I think for now country selection is more important.
7:28, as i read your first sentence i was thinking SQM but, well so where you. lol. for some reason i think there is a russian company in this space. i do not recall the name and i may be wrong but beyond that SQM is all that I know of. disclosure--do not own it.
Roger,
The most significant comment IMO is that Shilling is predicting a deflationary future. This is clear from his advice. Eventually I think he will be correct, but for now expect more money flowing from the Fed.
How or why is everyone ignoring a Republican being elected senator from the Peoples Republic of Massachusetts? No matter which side of the aisle you may lean going from 60 votes to 59 in the senate is a big game changer. There will either be grid lock or compromise leading to more centrist bills coming out of Washington.
SEG
anon 7:28--try jubakpicks.com and search lithium. In addition to SQM, he mentions FMC and several other miners. He also digs into other angles (battery makers and other rare earth miners, for example.)
Apologies, Roger. I don't mean to send your readers away.
its ok, this site is exactly a place to stay all day XD
Anon 8:00. Thanks for the Jubak reference. That's another reason why I love Roger's site. We all benefit from each other's input and feedback. Thanks Roger!
It's interesting that Jubak mentions JCI but not ENS as a hybrid battery play.
Jumping on SEG's comment about a republican winning the senate seat held by Ted Kennedy (Disclosure: I am a republican). Yes, this is, or can be, a watershed event. The republicans now have some power; they can filibuster in the senate. Hopefully, they will use the filibuster in a reasonable and prudent way. Ironically, however, like the republican landslide victories in 1994 were to Clinton, this event probably will save Obama and from his left wing (his political home) and enable a second Obama term. A repeat of the 1990's stock market, however, would be a good thing.
I am not predicting a return of the 1990 stock market, but I prefer congress to be more balanced. Super majorities on the left or right lead to extreme political action and that is not good for the country or the economy IMO.
SEG
Shilling's list is reasonable. The deflationary scenario is what we are trying to get through, not something waiting in the wings for later, and loss of supermajority an already centrist senate makes a conservative and/or fully gridlocked policy agenda more likely. This increases the probability of more severe deficit reduction policies, possibly as a means to get any reform passed at all, which in turn increases the likelihood of a second dip recession. the Fed's ability to continue enlarging its balance sheet, already under constraint, will be further curtailed so a larger than expected market correction becomes more likely in this scenario as well.
Discussion of politics is typically useless from an investing standpoint even when it isn't boring or tendentious but in this case, speaking as a political independent of many years, we needed a more progressive policy agenda to counteract or repair the worst effects of the past neoconservative decade and now seem less likely to get it. None of this makes much difference to me personally -- I am wealthy, hedged w/ foreign as well as domestic assets, fully insured and my family safe -- but 10's of millions of fellow citizens w/o jobs or health coverage does not sit well and makes no macroeconomic sense either, particularly to anyone paying attention to money velocity or ongoing (mis)allocation of financial resources. So be it; we can only do what we can do. (shrug)
Long bonds look better than commodities and equities at the moment but some of this will be overreaction, a sudden realization by market punters that the "worst is over and big time inflation is right around the corner" story slash meme may have been overwrought and overbought. The next few weeks should bring more clarity.
PS: I've held JCI stock for nearly a quarter century and they have rarely been spectacular but have also rarely disappointed; growing business organically, expanding where they had abilities while growing sales, earnings and dividends consistently all the while. Not a recommendation, just a statement of fact. Batteries are a significant but not majority element of JCI's business and I'm not planning on selling JCI (couldn't afford to anyway, the capital gains hit would be huge) but don't think they are ideal for a lithium play unless you are patient and could also use some industrial sector diversification with a solid dividend growth kicker.
JMO
If one is considering long bonds, perhaps appropriate trust preferreds are worth a look. These are not widely covered, and thus with some research and timing one can buy the mispriced issues. Yields are high for many that are rated investment grade.
There are downsides to any investment, but for income oriented investors, trust preferreds are worth a look.
T
Roger,
Schiller was very bearish back in march/09 an in april he was saying to waite because P/E would come down more.
According to my new analysis that I have conducted back in march securities where undervalue, today we are fairly valued and back ib 2000 and 2007 we were overvalued. If one believes that what we had was a suckers rally then this is the point that we should come down, where securities will become undervalued. There are many things that have happened since march/09, Many stock services are playing their games, subscribe and will give you the next best 10 stocks that will make you a millionare. Back in March/09, subscribe and we will tell you how to be defensive and not lose money. We have not reached that extreme overvalued point. But, how does a suckers rally behave? I still have not figured out if this is a suckers or a real bull. If it is a suckers then we should go down from S&P 1166.
Best,
Jeff from Milan, Italy
Roger: Just curious. What does a money manager like you do when the market tanks like this, led down by the commodity producing countries; do you re-examine your assumptions, place stops, or just watch it drop like water torture. Or, do you just shut it off and look at the end of the day. Just wondering, am feeling some pain today.
L.D.
LD: While Roger can obviously speak for himself you might want to look at this site's archives which has a wealth of knowledge. The questions you ask seem to require a larger response then what would fit within one reply.
Jeff, Shilling did a good job recognizing the problem before most folks. in that light i don't think staying too bearish for too long is the worst sin.
LD, how'd you do on Nov 18? And how did any of your assumptions change based on what happened that day?
It is a very rare day that market action on a single day would cause an investor w/a longer term bias to conclude all or many of their assumptions are wrong.
OMG!! Stock markets are crashing all over the World on the dollar being worthless, oil running out, food being rationed, pork bellies selling and O.M.G.ium being in short supply!
Now we're back down to the dreadful apocalyptic lows of December 29, I'm going to short everything and buy canned goods and ammo. If we get through this alive I hope y'all will have enough gold to get you through the nuclear winter and socio-economic breakdown that will (surely) follow the health act.
Remember! Bird of a feather stick together..
What is happening with STO?
don't follow w/STO. It is down about the same as DKA.
when he says 'long-term bonds' - I believe he can only mean treasuries.
while long-bonds have corrected sharply, the yield really isn't much of a pick-up relative to the world as we know it now.
the ETF's in this space are useful to analyze because they follow the index provider rules and are therefore consistent.
something like TLT (14 year duration) paid out $3.64 last year, down from $4+ the previous years. assuming ~3.75 this year, I get a yield of about 4.1% for a 14 year duration security.
risk-wise, this security isn't unlike one of the tamer equity products. so I don't think you have much return here for the risk incurred.
frank
http://tinyurl.com/ybfp6gk
RW,
If you think deflation is a problem now, just wait until it is really a problem.
STO was downgraded from buy to hold by Collins Stewart. Never heard of 'em. I own it along w/ XOM, CVX, LINE, and NE.
A deflationary scenario implies a strengthening dollar but there are a number of economic externalities that could lead to a stronger $USD too as Mish Shedlock catalogs here at http://tinyurl.com/yjonyrv (Minyanville; intrusive ads).
As I've commented previously, a stronger $USD is not likely to be good news for asset prices in this environment however you slice it. Add an appreciating Yen to the mix and the carry trade collapses with the probability of a major global sell-off increasing to the point of near certainty; but everyone has cash reserves on hand to take advantage of that, right?
It is hard to argue with Shilling's thesis that we are in a deflationary environment. Bank lending is contracting as banks rightfully tighten their lending practices, and consumers demand for credit is diminishing. After two decades where debt increased faster than GDP growth, this reversal leads to a deflationary environment.
The only area experiencing inflation are asset prices (except homes) despite the doubling of the money supply by the Fed. Without that boost, deflation would probably be even more prevalent.
The election of Brown may lead to more gridlock, which would reduce the amount of future bailouts/stimulus, but I don't think that is all bad. Japan has spent 20 years "stimulating" the economy and have had nothing but deflation. So stimulus isn't the cure. It just exacerbates the excessive debt situation.
I hold long T-bonds not as a directional bet but a "this is how the financial system works" type divisifier ala the Permanent Portfolio. That said I rested a little easier with the long slide in T-bonds after reading the predictions of the financial blogger round table that Roger posted about a while ago. Every blogger that was willing to make predictions panned T-bonds, and I smiled to myself ;->
Regarding the political commentary I think there are studies showing that when congress is grid-locked or in recess the stock market does better. I guess this is because the political risk is is contained at least for a while.
If I were a moderate democrat senator or representative I would be thanking my lucky stars that Brown won - since it might save me at least temporarily from being ordered to political death by Pelosi or Reid. A party line vote on un-popular legislation will/would mean the end of a career for many politicians.
I am thankful for the health care debate in a perverse sense - sure it is irrelevant and completely out of touch with the economic realities facing citizens right now. But at least it keep congress from messing up a part of the economy that is working LOL.
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