Jubak: 10 key trends for investors in ’09

Jim Jubak’s year-end article highlights 10 key trends for 2009 and notes that knowing the hot sectors in 2009 should help the investor beat the market. From the article:

10 macro trends

Take a look at my 10 macro trends, and afterward I’ll explain which are hot and which are not for 2009. In my book, you’ll find a chapter devoted to each:

  1. Go where the growth is, and that means putting some money into the developing economies of China, India and Brazil.
  2. The rise of the global blue chips. These companies are emerging from the world’s developing economies to challenge Coca-Cola (KO, news, msgs), IBM (IBM, news, msgs) and Wal-Mart Stores (WMT, news, msgs) on the global stage.
  3. The world is getting wealthier and older at the same time. So who’s going to manage all that retirement money?
  4. Inflation is beginning a new era. After 20 years of low inflation, the world is headed for a decade of rising prices.
  5. The world may not be running out of oil — then again, it might be — but it sure has run out of cheap oil. You can make back in the stock market what you pay at the pump — and more.
  6. The commodity crunch. Developing economies are demanding more iron, more copper, more nickel, more coal — and that has set off a boom for mining companies and the companies that equip them.
  7. Food is the new oil. It’s turning out to be as hard to increase food supplies as it is to find new oil. We’re looking at a decade of higher food prices driven by competition with biofuels and the fact that people in the developing world will eat more pigs, chickens and other sources of protein as their incomes rise.
  8. We’ve dragged our feet, but environmental problems have become so pressing that it’s time to save the world and make a buck.
  9. The technology sector doesn’t look anything like it used to, but fortunately the same rules still apply to what I call “hidden tech” stocks.
  10. It used to be that stocks and bonds from the United States got a premium in the financial markets just for showing up. Investors were willing to pay more because the U.S. markets were so stable. They’re still among the world’s best in that category, but now they’ve got company from Canada, Australia and, of all places, Brazil.

What’s hot for 2009? You can see the news moving toward three of these trends and setting up stocks in these sectors for better-than-market gains.

The hot trends for 2009 are:

  • Inflation. Gold has started to move up. The U.S. dollar has started to move down. Overseas investors are cutting back on their purchases of dollar-denominated debt. And the faithful news consumer can see the beginnings of a tidal wave of articles and editorials worrying about the inevitability of inflation now that the Federal Reserve has decided to pay overtime to the crew that prints paper money.
  • Food. Yes, food commodity stocks collapsed in 2008. And, yes, prices for food commodities went into a retreat that turned into a rout; the prices of major grains are down 50% from their 2008 peaks. But don’t count on food getting cheaper still in 2009. All the signs point the other way. The United Nations’ Food and Agriculture Organization has warned that because of the global credit crunch, many farmers lack capital to buy seed and fertilizer for the 2009-10 growing season. That’s likely to show up in commodity prices, via the futures market, by mid-2009.
  • Stability. Companies able to deliver solid revenue and earnings at or maybe even a little above expectations are rare as hens’ teeth at this stage of the recession. Companies with those kinds of results are also in a position to use the current global slowdown to attack weaker competitors, buy market share and aggressively develop new products. That’s a combination investors particularly prize in the current uncertainty.

I’d give those three trends green lights right now. You can start building positions in these trends in the first half of 2009.

In contrast, I’d say the following trends are stone-cold for 2009: the commodity crunch, a world running out of cheap oil, and a world that’s getting older and wealthier. Those trends are still likely to pay off big in the long term — say, five to 10 years — but in 2009, commodity, energy and financial stocks have suffered too much damage for a quick recovery. We’re still looking at six months or more of crisis in these sectors as companies with big debt loads struggle to roll them over in a debt market with a severe shortage of buyers.

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2009 S&P Earnings=Further Declines??

As we look at the projected earnings for the S&P in 2009, we look at two articles that don’t paint a very positive picture. The first from Andrew Horowitz at the Disciplined Investor and the second from Bennet Sedacca of Atlantic Advisors Asset Management:

S&P 500 Earnings…Is that right?

December 31, 2008

There is an interesting battle going on. On one side is the tag-team of the Fed and the Treasury. On the other is corporate America’s ability to maintain profitability in the face of this severe downturn. Sometimes they are working together with a common goal, while other times they seem at odds.

Take a read of this interesting discussion from Jon Markman’s javascript:urchinTracker ('/outbound/article/www.markmancapital.net');">Strategic Advantage Newsletter (Also, definitely take him up on the 2-week free trial):

Earnings in the sink

Last week, we talked about the potential for continued broad-market weakness as the hotshot analysts on Wall Street continue to slash earnings forecasts in line with deteriorating economic conditions. These new estimate cuts will sour sentiment, inflate P/E multiples and generally make life difficult for the bulls trying to bust the market higher out of the current range.

So now we are seeing two sides emerge to fight on the early January ring on Wall Street. In the green trunks dotted with bull faces, we have New Year optimism, government intervention, and monetary policy support. In the red trunks marked with bear faces, we have falling earnings, rising global tension, a bleak employment outlook, home price collapse and bankruptcies.

So how serious are these earnings estimate cuts? Well, according to a study late last week by Thomson Reuters, the current estimated fourth-quarter earnings growth rate on the SP 500 has just gone into negative territory at -0.9%, down from +65% in August and +0.5% last week. You can see this progression in the chart below. A majority of the decline is tired to downward estimate revisions in the financial, materials, consumer discretionary, and energy sectors.

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What’s worrisome is that despite the reductions taken so far, more is on the way. Of the 10 sectors that comprise the index, the financials are still expected to be the largest contributor to fourth-quarter earnings growth. Analysts are looking for earnings of $5.3 billion versus a $16.1 billion loss last year. Without the financials, quarterly earnings for the S&P 500 would fall to -14.2%.

Within this sector, investment banks and brokerage houses are the largest contributors. Even with the myriad of Federal Reserve lending facilities that have allowed investment banks to offload decaying debt and derivative products in exchange for loans or Treasury instruments, it’s hard to see a turnaround of that magnitude happening so quickly. If it did, this would be the first quarter of profitability since mid-2007.

Banks are trying to minimize losses via cost cutting, but it’s revenue side of the picture that has been annihilated for these guys. Just last month JPMorgan Chase (JPM) closed its proprietary trading desk, greatly reducing its ability to directly profit from short-term movements in stocks, bonds and commodities. A record number of M&A deals were canceled this year, bringing a sharp decline in lucrative advisory fees for traditional investment bankers. And of course, the asset management business has been smashed; just ask investors who lost $1 billion in Goldman Sachs’ hedge funds.

As you can see, just by isolating the financials a strong case can be made for double-digit earnings declines for the S&P 500 heading into 2009. On top of this, you don’t need to do much mental jujitsu to make bearish cases for many of the other sectors as U.S. economic output likely fell off the cliff this quarter: Merrill Lynch (MER) economists are looking for fourth-quarter GDP to clock in at -6.7%, down from a -0.5% decline in the third quarter. It doesn’t get much better looking out into 2009, where the economy is expected to shrink another -3.1%.

Any way you look at it, earnings estimates still have a long way to fall as the fixed asset deleveraging ravages profit margins, and analysts are likely to remain behind the curve. Although anything can happen, we remain skeptical going into the start of the year even if begins with a bang.


size:100%;">Will Darwinism return to the markets?

family:arial;font-size:85%;" >This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

family:arial;font-size:85%;" >As regular readers know, I have had a cautious, even bearish view, towards equities and credit over the past couple of years. The handwriting was on the wall and both equities and credit seemed woefully overvalued. That being said, our longstanding target for the S&P 500 of 750-800 was reached this autumn, a level that has held even in the face of awful economic news.

family:arial;font-size:85%;" >I do believe an ultimate low of 500-600 is possible, but most of the pain (in terms of price, not time) has been faced. Some people will tell you that the bad news is now ‘priced in’ for the S&P 500, but I strongly disagree.

family:arial;font-size:85%;" >According to S&P, their “top down/macro” earnings estimate for 2009 has fallen all the way to $42 per share. This is in direct contrast to the cumulative “bottom up/stock-by-stock” estimate of $70 or so from Wall Street analysts. The Wall Street folks have been overly optimistic for 20 years or more while the S&P has a habit of being on the mark as they don’t have an axe to grind.

family:arial;font-size:85%;" >My point is that while the S&P 500 has moved from nearly 1,600 to a recent 860 (a 45%+ decline) it remains at a healthy 22 times S&P’s earnings estimate for 2009. Bulls will tell you that the market is cheap because even if the $42 earnings number is correct, these are “trough” earnings or the low point for the cycle. I will concede that even if the $42 IS a trough number, the market is not cheap on any other metric, price to book, dividend yields, etc. In addition, P/E ratios based on trough estimates assume that earnings will rebound sharply once the bear market is over, but this is certainly not our outlook.

family:arial;font-size:85%;" >I must concede that the easy call, being out of stocks or underweight stocks in general, has been made. For 2009 and forward, a general call on the overall market will not be as easy, but good money can be made in company selection and sector rotation.

family:arial;font-size:85%;" >While equities in the US suffered 40% losses for 2008, corporate bonds and other credit sensitive securities got killed (some “core” fixed income managers were down as much as 25% for the year). The pity about 2008 for most investors is that they were let down by what was supposed to save them – DIVERSIFICATION. The year 2008 will be remembered as the year of the “1 beta event”, a year where there was nowhere to hide, except in Treasury notes and bonds.

family:arial;font-size:85%;" >We fully expected the “1 beta event” which explains why we were nearly void of equities (for clients that allow us to go to a 0% weighting) from April until our buy in the 750-775 area in the SP in November. While we are not close to being bullish about stocks in general or even credit in general, I believe that pockets of value are beginning to develop in some risky asset classes.

family:arial;font-size:85%;" >I also believe that we will enter a period of Darwinism where the best managed companies pick up the pieces of poorly managed companies that will likely fail. I believe that Darwinism will occur at the national, corporate, municipal and individual level.

family:arial;font-size:85%;" >Click here for Bennet’s full report.

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