What I am Buying in This Rotten Economy
July 16th, 2010 by Skip McGrath
The risk of a double-dip recession is no longer in doubt. It is looking more and more like various government stimulus programs, free money from the Fed and housing incentives caused all of the recent gains. Those have now expired and we are seeing the real economy. Consider:
- Despite low record interest rates, mortgage applications have now fallen to 1996 levels
- Federal Reserve rates are between 0% and 0.25%. There is no more room to lower rates
- Job growth has stalled. The Bureau of Labor Statistics reports that 15 million unemployed people are competing for 3.2 million job openings — a ratio of unemployed to jobs of nearly 5 to 1
- Wholesale Purchasing has stalled
- Consumer confidence has tanked
- Total inflation is 0% and core inflation (less food and gasoline) is at 0.2%
- Retail sales are falling. US savings rates are at a 20-year high. People are repairing their personal balance sheets by paying off debts and cutting spending.
So where is one to invest?
The two areas that look good on a worldwide basis are energy and materials. Hot economies such as India, China, Russia and Brazil and moderate growth economies in Eastern Europe, Australia and Canada are growing enough to increase the worldwide demand for oil and critical materials such as aluminum, copper, iron ore and so on.
Lets look at a few opportunities:
Energy
Individual stocks in the energy patch can still be risky –i.e. BP. One of the investments I like are the multiple limited partnerships (MLPs) in pipeline companies. According to research from Morgan Keegan, MLPs have delivered compound annual returns of 18.5% over the last 10 years. That’s about 6% more than income trusts and 7% better than utilities. They pay large and steady dividends and make money no matter what the price of oil is. My favorites are MarkWest Energy Partners (MWE) that now pays a 7.5% yield and DCP Midstream Partners (DPM) at 7.1% yield.
As for the overall energy play, I like the ETFs Energy Select SPDR (XLE), which tracks a basket of leading energy stocks and the United States Oil Fund (USO).
Materials
For materials I like the Peru Country fund. Peru is a major producer of copper, gold, silver and even lithium used in all the new electric car and computer batteries. And the country of Peru is enjoying excellent economic growth. the Peru country fund (EPU) tends to tank whenever the US market tanks, but then it detaches itself and starts acting like a growth fund that it is. It can be a little volatile, but should do well in the long term.
Gold Investing
The other area I am in is Gold. Gold has consolidated a bit to the 1160 range down from a recent high of 1266. It could consolidate a little more to 1140 or so. This is typical – Gold always retreats and tests support after a large sudden run up. And the summer is seasonally not strong for gold –sometimes called the summer goldrums by experienced investors. But even Forbes Magazine who very conservative is predicting gold prices of $1320 by the Fall while most professional gold investors are forecasting a run up to $1390 before consolidating again with an eventual target of $1500 by the end of the year. the State of Texas Teacher’s retirement fund just purchased $500 million dollars of gold -almost three percent of their total holdings.
My favorite gold plays are the physical gold ETF with the symbol GLD and the basket of gold mining stocks, symbol GTX. If you want a little risk, I have done really well with a junior gold miner New Gold. It has been as high as $7 but has now settled back to the $4.50 to $5.00 range where I added to my original position of 500 shares bought at $3.30.
Caution
As I have pointed out in previous posts – I am not a professional investor or investment advisor, so do your own research –but I just rebalanced my portfolio and put a lot of the stocks and funds mentioned here today into play.
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