Saturday, January 2, 2010

Investment Predictions for 2010

It's that of the year again when everyone looks forward optimistically to a brand new year. And it's also the time of year when you hear all sorts of predictions for the new year.

As I did last year, I will share a few of my thoughts about the upcoming year in the financial markets. But first, I will look back at what surprised me most about 2009.

I was correct that emerging markets and commodities and corporate bonds would be outperformers for the year, but I am absolutely shocked at the size and length of the upward moves in 2009 for most financial assets.

And the rally in the US stock market and other financial markets is still going strong. Why?

It comes down to the shocking (to me) decision in March by the Federal Reserve to not only lower interest rates to near zero but to adopt quantitative easing. In layman's terms, to print trillions of dollars out of thin air...and sadly, most of this money went directly to Wall Street where they used this money to speculate in all types of markets. And why not - it's 'free' money!

Since the Federal Reserve chose this route, the US dollar has dropped in value by more than 15 per cent and by about 20 per cent on an annualized basis.....

I never thought Ben Bernanke and President Obama would choose this route of devaluing the dollar and lowering Americans standard of living as a 'bailout' for Wall Street, but I was wrong.....

They have and I expect those policies to remain in place for as long as they can get away with it.

Their hand will be forced by either Americans bitching that they don't like having the dollar lose 20 per cent of its value per year which is unlikely, since most Americans aren't even aware of it.....

Or if their hand is forced by our overseas creditors, such as China, which is much more likely. A recent example of this was India's decision to sell $6.7 billion of US Treasuies and to purchase gold with that money.

But enough about 2009, what will happen in 2010?

The obvious answer is that no one knows, but here is my two cents worth.....

GOVERNMENT BONDS - It is ok to park your short-term money into short-term US Treasury bills, but I urge ALL investors to avoid any longer-term US Treasuries. Thanks to the Federal Reserve's money printing, this is the biggest bubble in financial markets history...when it bursts it will be hell for anyone who owns these bonds, such as the Wall Street banks (again) and those people who have rushed into the 'safety' of bond mutual funds this year. The Treasury bubble may not burst for years - who knows - but why take the chance.

OTHER BONDS - I do continue to like other bonds, such as corporate bonds of strong multinational companies. Another area I like for the long-term are bonds of emerging market countries which have billions or even trillions of dollars in reserves, unlike the United States.

CURRENCIES - I expect to see a solid short-term countertrend rally in the US dollar before it resumes its downward spiral. The currencies I like for the longer-term are those of the major emerging countries like Brazil and China and also the currencies of country that have and produce lots of natural resources like Canada and Australia.

COMMODITIES - I continue to urge people to add gold to their portfolio as an 'insurance policy'. I do expect commodities to seesaw higher, propelled by a lower US dollar, increasing demand for commodities from emerging markets and most importantly - diminishing production.

Most people are unaware that the production of many commodities is dropping...even sugar and cocoa are at multi-decade highs because of lower production. And to bring a major project online, be it either a mine or an oil field, takes 5 to 7 years.

STOCK MARKETS - I do expect to see a large correction in ALL global stock markets fairly soon. With that being said, I still favor the emerging markets for the long-term. The future of the global economy lies with these nations - this is where most of the economic growth will come from. Of course, many American companies can and will participate in that growth.

I continue to favor sectors that benefit from the growth in the emerging markets such as commodity and industrial companies, and other sectors such as consumer goods and pharmaceuticals.

The only sectors I strong dislike are the US financial sector - who still have perhaps trillions in bad loans still 'hidden' and papered over by government support - and some of the tech stocks. The recent action in Apple, for instance, strongly reminds me of the action before the tech stock bubble burst in 2000.

That's my two cents worth - I hope everyone has a happy and prosperous new year!

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