2011 is shaping up to be a volatile year. The euro debt crisis threatens to expand to include Spain—before Greece and Ireland have moved out of danger. The U.S. economy seems to be on a path of moderate growth but the end of spending from the 2009 stimulus package in 2011 and the uncertain effects of the Federal Reserve’s $600 billion program to buy Treasuries and of the extension of the Bush administration tax cuts leaves the country poised between too much inflation and too little growth. China’s economy is in danger of overheating but it’s so hard to calculate the odds that the central bank will raise interest rates and cut growth down to 8% or so that I’ve actually suggested that investors watch next summer’s vegetable harvest for clues (https://jubakpicks.com/2010/12/17/so-much-depends-on-the-peoples-bank-of-china/ )

But that doesn’t mean you won’t be able to make a profit, a pretty good profit in 2011. As I noted in my post https://jubakpicks.com/2010/12/07/why-2010-was-so-volatile-and-why-2011-will-be-just-as-wild-a-ride/ 2010 was a wildly volatile year and yet, as of the beginning of December investors were looking at a return of 10.64% for the first 11 months of the year–once you adjust for inflation and dividends—versus an annual average return of 8.71% for the Standard and Poor’s 500 stock index (after the same adjustments) since 1950

Making money in 2011 won’t be impossible. Just hard. It will be a year when you need to put all the trends you can identify at your back—so that you have the best chance of beating the market averages. And then you’ll still need to pay careful attention to individual stock picking.

Today I’m going to quickly lay out three trends that I think will be strong enough pull your portfolio higher—if you hitch your investing to them. And then give you 10 individual stock picks for taking advantage of those trends.

Why start with the trends? Why not go straight to stock picks? In a volatile year, like 2010 or, as I project 2011, the toughest challenge is staying invested. And the second toughest challenge is knowing when to use the swings of the pendulum toward excessive fear as a buying opportunity. (For more on this see my post on investing when you fear the zombies are about to walk https://jubakpicks.com/2010/10/26/how-to-profit-today-when-you-think-the-financial-zombies-will-walk-tomorrow/) You want to use market volatility to buy low—and not to have it send you running to the hills after you’ve sold low. And the easiest way to do that is to indentify some longer-term trends that you want to own through any reasonable amount of volatility.

What are some of those longer-term trends for 2011? Here are three.

• Food prices are headed higher and so are farm incomes. Speaking at the Bank of America/Merrill Lynch Global Industries Conference on December 15 fertilizer company Potash of Saskatchewan said that by the middle of 2010 it had become apparent that for the eighth time in the last 12 years grain production would fall short of consumption and the world would have to draw down its stockpiles. In 2011, Potash estimates, it will take a 5% increase in grain production to keep pace with consumption. That will be a tough if not impossible task since grain production has grown by only an average of 2% a year in the last few decades. Without a record increase in production, global grain stocks would fall to the historical lows of 2006 and 2007.That’s certain to produce higher grain and food prices—good for farmers and the companies that sell stuff to them, but bad for consumers, especially poor consumers. According to the Food and Agricultural Organization of the United Nations, as of November 2010 the year-to-year increase in the global food price index was 22%.
• Encouraged by rising commodity prices and the real possibility of supply falling short of demand for such commodities as copper, the global mining industry is raising capital-spending budgets for 2011 and beyond as fast as it can. A survey of global mining executives by the Financial Times puts mining capital spending at $115 billion to $120 billion in 2011. That would be a new record, surpassing the peak of $110 set in 2010. Now I can’t tell you what the price of any commodity will be in 2011—too much depends on where the People’s Bank of China comes down on inflation and growth in 2011. (See my post of the same name for more on that decision https://jubakpicks.com/2010/12/17/so-much-depends-on-the-peoples-bank-of-china/ ) But I can tell you that mining companies are not going to cancel orders for capital goods on volatility in commodity prices and they’re going to be, in fact, extremely reluctant to cancel orders even on extraordinary volatility because they’re afraid that they’ll lose their place in the customer line. The lesson that these companies remember from the last big commodities boom is that supplies of capital goods are extremely limited and suppliers can’t quickly ramp up to meet demand. Order early or forget about getting your order filled at all.
• 2011 is shaping up as a year of stability on interest rates by the world’s central banks—or at least a year when fears of interest rate increases from those central banks start to recede. The U.S. Federal Reserve isn’t going to raise the short-term interest rates it controls in 2011. The European Central Bank won’t raise rates significantly in 2011. Central banks in many developing markets are likely to finish interest rate increases in 2011. The People’s Bank of China isn’t much of a wildcard—the bank is signaling that if it raises rates at all in 2011 it won’t be much more than a gesture. This doesn’t mean that long-term interest rates, the ones central banks don’t control, won’t keep rising. In comparison to historical real rates—that is interest rates minus inflation—long-term rates are extremely low. So I expect to see interest rates at the long-end of the yield curve continuing to move up. But that’s exactly what should happen as the world’s economies, especially the U.S. economy, return to something like the pre-crisis normal. (For more on the trend in interest rates see my post https://jubakpicks.com/2010/12/14/higher-interest-rates-lower-bond-prices-its-a-new-world/ ) In this scenario bank profits should move up—banks raise funds at short-term interest rates and lend at long-term interest rates. Add in falling default rates on consumer credit and mortgage loans, and some uptick in sentiment produced by whatever leaders in the United States and the Eurozone contrive to deliver as gestures toward fiscal responsibility, and 2011 looks like a good year to be a lender.

Now some stock picks for 2011 to go with these trends.

• Higher food prices and higher farm incomes: farm equipment maker Deere (DE), fertilizer producer Yara International (YARA), irrigation equipment maker Lindsay (LNN), and seed company Syngenta (SYT).
• Rising capital spending by commodity producers: mining equipment maker Joy Global (JOYG), tire and wheel maker (for mining and farm equipment) Titan International (TWI), and copper and gold miner Freeport McMoRan Copper & Gold (FCX) because it has the ability to expand production at a very modest cost in capital spending. (For more on the capital spending story at Freeport McMoRan see my December 14 buy on the stock https://jubakpicks.com/2010/12/14/higher-interest-rates-lower-bond-prices-its-a-new-world/ for my Jubak’s Picks portfolio https://jubakpicks.com/the-jubak-picks/ )
• Better times for banks: Spanish bank Banco Santander (STD) and U.S. banks Citigroup (C) and JPMorgan Chase (JPM).

These ten picks won’t give you a balanced portfolio. The group is heavily weighted toward commodities in one way or another. To these ten I’d look to add technology, where I favor chip equipment makers such as ASML Holding (ASML), transportation equipment makers such as Cummins (CMI), and consumer goods companies such as Google (GOOG), Apple (AAPL), and Amazon.com (AMZN).

On those, though, I’ll think you’ll have to depend on your belief in the specific company to keep you on board during the volatility I’m projecting for 2011.

Just remember that in a volatile year, you don’t want to buy anything—trend or individual company—that you don’t deeply believe in.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, ASML Holding, Banco Santander, Citigroup, Cummins, Deere, Freeport McMoRan, Joy Global, Syngenta, Titan International, and Yara International as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/