Many investors figure the smartest thing they can do now is nothing.
They’ve raised the cash they need to raise and they don’t feel compelled to sell anything in a hurry. And they certainly don’t feel like there’s any rush to buy anything.
Yep, doing nothing strikes many folks as the right thing to do.
I mostly agree.
The Jubak Picks portfolio is about 35% in cash. (I might raise a little more but nothing huge.) As I wrote last week, I’m waiting for a buying opportunity in China (see my post http://jubakpicks.com/2010/06/03/think-chinas-bear-market-is-a-buying-opportunity-heres-one-way-to-tell-when-to-get-in/ ) but that’s not likely until July or later. The U.S. market is outperforming most of the world’s markets, but that’s not exactly a ringing endorsement considering. Until the growth picture for the U.S. economy gets a lot clearer—You did see the disappointing June 4 jobs number for May, right?– I don’t feel a need to add to my U.S. growth stock core in Jubak’s Picks of stocks such as Cummins (CMI), Whirlpool (WHR), Microsoft (MSFT) and Intel (INTC). The euro debt crisis will end someday but someday looks like a way down the road. And now we’ve got a political crisis in Japan that may or may not be resolved by July’s elections.
Nope, I’m not looking to make much in the way of buys or sell.
But that doesn’t mean I’m doing nothing.
It’s time, in fact, to be hard at work on your watch list (mine is at http://jubakpicks.com/watch-list/ ) if you want to be ready when it is time to buy. Right now you should be pruning that list to make sure you’re not fixated on buying the stocks that did well in the last market for the next market. It’s time to be scouting for new opportunities, stocks that seem especially attuned to the next market’s sweet spots.
In this column I’m going first to take the pruning shears to Jim’s Watch List, and then, second, identify some new growth that’s worth your attention.
Pruning and then replanting a watch list eventually gets very concrete and specific—you do need to name individual stocks for the list—but it starts off general and speculative.
How to begin?
Exactly—or as exactly as you can anyway—describe the kind of market you’re watching for. Put a time period on it. And remember that you’re looking ahead and not back.
Here’s what I’m watching for: sometime in the next six months or so, emerging markets will have resolved the problems that are now worrying investors—at least for a while.
China will have proved that it can raise the capital that its big banks need. The Agricultural Bank of China IPO (initial public offering) will prove that if the $30 billion share offering in Hong Kong and Shanghai goes as scheduled in July. (For more on that IPO as a stock market indicator for China, see my post http://jubakpicks.com/2010/06/03/think-chinas-bear-market-is-a-buying-opportunity-heres-one-way-to-tell-when-to-get-in/ )
Growth in China will have slowed enough so that the Beijing government can stop making threatening noises about ending speculation in the real estate market and clamping down on signs of inflation. Whether or not the dangers created by too much money flowing through China’s economy are truly over, China’s government will declare victory.
Other developing economies will reach the end of a series of interest rate increases designed to slow growth and head off rising inflation. Brazil’s central bank will most likely finish its rate increases by the fall, for example. India is on a similar schedule.
The end of growth fears in China and interest rate increases in developing economies will remove the major internal downward pressure on stock prices in these stock markets.
Europe and Japan won’t have solved their long-range economic problems—growth in those developed economies will continue to lag that of even the United States. But the euro debt crisis will have gone from red hot to a simmer. Investors won’t be worried that every bank in Europe is going to fail.
U.S. economic growth will be strong enough to revive fears of interest rate increases from the Federal Reserve for 2011 but not strong enough to quickly lower unemployment or to give Washington politicians any easy way to reduce the budget deficit. With partisan gridlock increasing with every month we get closer to the 2012 presidential race (especially if the Republicans win a significant number of House and Senate seats this November), overseas financial markets will start worrying about the dollar again. Not enough to reverse the dollar’s climb against the euro but enough to keep the dollar from picking up more ground.
Summarizing, by the end of 2010, I’ll want to own more emerging market stocks than I do now and more of the commodity-related stocks that rally when worries about growth in China, India, Brazil and the rest of the gang disappear. I won’t turn up my nose at a bargain in a European or Japanese stock but these markets are likely to face strong headwinds. The best buys in Europe, the biggest bargains, will be bank stocks because they’re so depressed now. U.S. companies that can take advantage of the return of optimism to developing economies will do well. Purely domestic U.S. companies are likely to be less attractive as the U.S. stock market loses its distinction as the best performing stock market, relatively, in the world. U.S. bank stocks are likely to outperform the U.S. stock market as a whole as fears from the euro debt crisis recede and as investors know exactly how far Congress will go in restricting the banking industry.
At least that’s the way global stock markets look to me now.
So let’s prune my watch list with that in mind.
First whack, let’s get rid of the safe emerging market stocks. These were attractive when I was looking for safer picks in these markets—safer because of dividends or a history of steady cash flows—but now that I’m planning buys that will take off as worries about interest rates and economic growth recede I want less safety and more risk. I think some of these are still good choices for my dividend income portfolio, especially because emerging market stocks are starting to show surprisingly high dividends (see my post http://jubakpicks.com/2010/04/13/asian-stocks-beat-u-s-equities-on-dividends-who-knew/ ), but for investors looking for gains from capital appreciation, I think riskier commodity, bank, and export growth plays offer more upside.
So out with Jim’s Watch List entries that are safer dividend plays such as telecom companies Philippine Long Distance (PHI), Turkcell Iletisim (TKC), and Telkom Indonesia (TLK). Out with China dividend play Jiangsu Expressway (JEXYY).
Out with U.S. domestic companies such as retailer Wal-Mart (WMT).
Out with long-term growth or relatively safe financial plays such as MetLife (MET), Standard Chartered (SCBFF), and Standard Bank Group (SBGOY). The bank stocks that will bounce back fastest once the euro debt crisis has turned into the euro debt simmering worry are those that have been crushed most—without going under—in the worst days of the crisis.
And finally out with those ideas that just don’t work anymore—and perhaps never did. In that group I’d put Prudential (PUK), which I added to the list because I liked its acquisition of American International Group’s Asia business—but the acquisition was never completed. I’d include ITC Holdings (ITC), a pure play on the need for more and better electric transmission lines, which just doesn’t look like it will play out in the current thinking about an energy bill. It doesn’t look like a good time to be trying to add oil company Apache (APA) to the portfolio. China Medical Technology (CMED) has underperformed even considering the bear market for Chinese stocks in general. And finally I’d include Polypore International (PPO) on valuation. While I’ve been waiting for a good time to buy, the stock has gone up 80%.
And what would I add given my view on the future of global markets over the next 12 to 18 months?
I’d add bank stocks such as JPMorgan Chase (JPM) and Banco Santander (STD) that have been crushed in the selloff of bank stocks but that are fundamentally sound and stand to pick up share from competitors. (See my post on U.S. bank stocks for more on JPMorgan Chase http://jubakpicks.com/2010/06/02/want-to-tag-along-as-the-smart-money-buys-bank-shares-here-are-three-stocks-stocks-that-fit-the-strategy/ and see my recent update on my Dividend Income Portfolio for more on Banco Santander http://jubakpicks.com/2010/05/28/4084/ )
I’d add a Brazilian stock such as sugar cane to ethanol powerhouse Cosan (CZZ) on the end of 2010 end to interest rates increases in Brazil.
Among global commodity stocks I’d add Freeport McMoRan Copper & Gold (FCX) because copper prices track economic growth, especially economic growth in China, so closely, and mining equipment maker Joy Global (JOYG).
And I’d add Chinese stocks such as Mindray Medical International (MR) and solar cell producer Suntech Power Holdings (STP). (For more on solar stocks see my post http://jubakpicks.com/2010/06/04/the-gulf-oil-spill-is-so-bad-that-maybe-just-maybe-energy-legislation-is-alive-again/ )
This isn’t the end of my watch list planting for new growth. I’m going to stop here with this list of stocks to add to the watch list. After a market correction, watch lists have a tendency to include just those stocks that an investor thought to buy before the correction but that were too expensive then.
To avoid that trap, you need to wipe the slate clean and go looking for new stock ideas, not simply those stocks that are cheaper now than they were then.
In my June 11 post I’ll show you one way that I use to generate new ideas and add three blank state, new ideas to my watch list.
Full disclosure: I own shares of Banco Santander, Mindray Medical, Standard Chartered, Suntech Power, and Telkom Indonesia in my personal portfolio.