- Created on Monday, 20 December 2010 17:27
- Written by Sara Nunnally, Editor, Smart Investing Daily
- Hits: 6538
We're heading into a chaotic couple of trading weeks. With Christmas and New Year's back to back, the financial market's volume could be very choppy, and stock prices could be the same way.
So, instead of trying to predict where the financial markets are headed over the holidays, let's jump into 2011 and see what we think of all the talking heads' predictions. They're on every major business news site, touting the top 10 investment picks for 2011, or the five best places to invest in 2011, or some variation of the two.
I sifted through a bunch of these and found some commonalities. Let's put these investment predictions to the test...
Investment Prediction #1: Growth in Emerging Markets Spur Commodities Prices
This prediction has pretty much been the mantra for emerging market investors for half a decade or more -- interrupted by the global financial crisis.
Here's what happened then: Emerging markets were very dependent on developed economies. They needed countries like the United States to buy its cheap goods. U.S. manufacturing poured into low-cost labor countries like China.
Now, the theory is that emerging markets themselves have become major consumers -- particularly when it comes to commodities.
Renee Haugerud, founder and chief investment officer of hedge fund Galtere Ltd., told Fortune, "Wealth is shifting from developed economies to developing ones. As incomes grow, you move up the protein food chain. So you eat more meat, chicken, beef, and pork, which creates more demand for grain."
Jonathan Burton for MarketWatch writes, "Emerging nations' ultimate goal is to create societies of comfortable middle-class consumers, but first those people need roads, bridges, houses, electricity and other modern conveniences."
Is this true? These are certainly broad predictions...
China, which has long been the economic engine for emerging countries, is still growing at breakneck speed; Brazil has been on everyone's mind with the coming Olympics and World Cup.
The USDA reports that China's food imports, including live animals, have increased every year since 1998. Some of the biggest jumps were from 2006 ($9.994 billion) to 2007 ($11.5 billion), and from 2007 to 2008 ($14.051 billion).
Last Monday, JPMorgan's analysts said that the global steel industry, of which Brazil is a major producer (and China is a major consumer), may be on the rise. Steel prices could climb in the near future with higher demand and higher inputs.
On the whole, the premise is good. Emphasis should be put on commodities and commodity-based companies, though, as emerging markets are still dependent on developed economies to some extent. Think steel or cement companies, or agricultural ETFs or ETNs.
(By the way, investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the market with our easy-to-understand articles.)
Investment Prediction #2: Information Technology Is the New Manufacturing Era
It used to be the U.S. that made things. But now, as I said before, U.S. companies have been shipping factories and jobs overseas...
That is, except for information technology.
Jim Swanson, chief investment strategist of MFS Investment Management, said, "We do make that. We export it. We're good at it. The rest of the world loves this. It's a sector that has doubled and tripled the free cash flow margins and EBIT margins it had 10 years ago when people were paying 40 times earnings. Today [the information technology] sector is trading at only about 16 times earnings."
Swanson says that valuations are low, but these IT companies are showing amazing earnings.
Take Apple, Inc. (AAPL:NASDAQ). Its earnings have increased 45% on average for the past three years.
Walter Price's Allianz RCM Technology Fund has returned 31% this year, as reported by Bloomberg Businessweek. Price thinks the sector will continue to see good cash flow and earnings from most companies in the tech sector.
"This scenario will continue to foster investment in technology," he said.
Investors are divided on Apple's stock price, however. Abhay Deshpande, who runs funds at First Eagle Investment Management, says it's too high.
Bernstein analyst Toni Sacconaghi, on the other hand, says, "The stock is definitely not overpriced, especially not for a company so well positioned in such fast-growing markets." And once it's out from under the AT&T contract, Apple will be able to access main wireless carriers in China, Japan, and South Korea. And let's not forget companies like Verizon here in the U.S.
The question is: Is all this potential priced in?
Maybe not... On Sunday, a comScore report notes that Americans spent $27.46 billion in 47 days buying online... up 12% from this time last year. And online sales of computer hardware are up 25% from 2009. That's more than likely because of the iPad, but we won't know for sure until Apple releases its sales report in January.
To me that means you might want to play Apple with options, rather than buying the stock outright. Whether you believe Apple' stock is overpriced or not, it's still a hefty price tag for many investors.
The rest of the tech sector will be on fairly solid ground, so long as the economy continues to recover in 2011. Buying the makers of semiconductors and electronics might suit your portfolio better than buying the big box stores like Best Buy or Radio Shack next year.
But let's get back to talking about the recovery. The one thing that rang completely true for me in all these articles was the commentary on bonds.
Investment Prediction #3: Bond Bubble Will Sideswipe Investors
Wally Weitz, manager of Weitz Funds, says, "All the flows we see are into bond funds, and it's over our protests because there's really nothing very good that can happen from 0% interest rates."
This happens in times of economic uncertainty. People look for investment that will give them guaranteed income, only now they're paying more up front for a smaller yield. U.S. 10-year Treasury bonds are yielding 3.330% as of Friday. You could get a better yield from a dividend company.
MarketWatch editor Jonathan Burton writes, "In addition to using dividend-paying stocks as bond substitutes, consider both high-yield and high-quality corporate debt, and stay with short-term and intermediate-term bonds and bond funds, which are better insulated from rising interest rates."
This shorter time frame also means you have a better chance of having more liquid cash than buying a 10-year or 30-year bond.
I can't say enough how much I agree with what the bond market appears to be doing.
In Barbarians of Wealth, the book Sandy Franks and I co-authored this year, I wrote, "When the United States went into a recession in 2007, the government took on an unprecedented role in the economy. It increased spending drastically to make up for the falling private sector. It sold billions of dollars in Treasury bonds and flipped the switch on the printing press."
This duel-pronged attack on the recession flooded the market with cheap credit and devalued our ability to pay back loans... That's what bonds are -- loans from the American taxpayer. The government uses future tax revenues to pay for those bonds.
But investors may be losing their appetite for bonds.
Marilyn Cohen, head of Envision Capital Management and a bond-investing specialist, says, "The [bond] landscape has changed. We're in for a bear market. Baby boomers have never lived through a bear market in bonds with their money in the market. They're going to get sideswiped."
Finding other ways to protect your wealth in 2011 -- other than the overused bond market -- will be a smart move.
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