Tuesday, January 12, 2010

"Dow Industrials hit record, top 15,000 by 2011?-Don't Bet Too Quickly"

From MarketWatch:

But first, Shilling's 2010 warnings: 17 picks = 6 buys + 11 sells

Yes, Dow 15,000: Jeffrey and Yale Hirsch's "Stock Trader's Almanac 2010," the bible of market cycles history, sees a possible 50% gain from 2010 lows to a mind-blowing 2011 high....

...But before you go ga-ga, jump on the bandwagon and rush back into Wall Street's high-risk casino, there is a darker side. Not many talk about it because we're all sick of the bad news since Wall Street's catastrophic failure. We all want something, anything, to help us forget Wall Street's "Lost Decade."

But before you start gambling again, please listen to Gary Shilling. For over three decades he's been rated one of America's top economic forecasters by Institutional Investor, Futures, the Wall Street Journal and others. Shilling's been a regular Forbes columnist since 1983, respected for his contrarian views, usually on target.

So let's cut-to-the-chase: Here are his latest: 17 Picks = 6 Buys + 11 Sells.

The good news: Six buys for 2010

  1. Buy treasury bonds. Back in 1981 Shilling first recommended Treasurys. Last year he said the "bond rally of a lifetime" was over. Not so fast: "We've reactivated the strategy with our forecast of a return in yields to 3.0% or lower." Treasurys are a "safe haven in a troubled world." Three reasons: Liquidity, limited calls and "best credits in the world."

  2. Buy income-producing securities. Wall Street's a loser: The S&P 500 "declined 23% in the last decade in nominal terms and has fallen 39% adjusted for inflation." Investors want "returns here and now as opposed to asset appreciation." Best bets: "High-quality corporate and municipal bonds ... stocks of utilities, consumer-product companies, health-care firms and others that pay meaningful dividends that are likely to rise.

  3. Buy consumer staples and foods. Think "laundry detergent, bread and toothpaste ... basic essentials of life purchased in good times and bad." More from supermarkets, discounters as national brands "adapt to consumer downgrading by emphasizing cheaper 'value' products."

  4. Buy 'small luxuries.' Shilling created this new sector: Hard-pressed consumers "buy the very best of what they can afford, even if it's within a low-priced category ... California winemakers are emphasizing cheaper wines ... Tiffany sales of products over $50,000 are weak, but high-quality small items continue to sell well, always in its trademark blue box."

  5. Buy the U. S. dollar. Despite drawbacks, "the dollar remains the world's reserve currency and safe haven, regardless of suggestions by the Chinese and others that the dollar should eventually be replaced by a global currency." How about gold? Fuggetaboutit. Never. "The recent strength in gold prices suggests that many investors distrust all currencies." But "the supply of gold is far too small, even at current prices, to again serve as money. Gold in private and government hands is worth about $5 trillion compared to global M3 money supply of $60 trillion. Gold would have to sell at $32,128 per ounce, vs. $1,097 at present, to replace the M2 money supply dollar-for-dollar."

  6. Buy eurodollar futures. "Eurodollars are deposits denominated in United States dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve," and "are subject to much less regulation than similar deposits within the U.S., allowing for higher margins." Note: "the 'euro' prefix can be used to indicate any currency held in a country where it is not the official currency. For example, euroyen or even euroeuro."

Now the bad news: 11 sells for 2010

  1. Sell U.S. stocks in general. Sorry, but Shilling says P/E ratios are at a "nosebleed 22.5 level" for a vulnerable 2010 market. But he's hedging his bet: "Be well aware that our forecast of a declining U.S. stock market is critical to many other strategies we'll discuss later that involve selling or avoiding equity sectors here and abroad. We believe they all will perform worse than the stock market overall, but if we're wrong and the stock market leaps this year, we'll probably also be wrong on many of these other strategies." Yes, a very big "if.">>>MORE