Theme #1 – Equities will outperform early in 2010

We believe that new money will flow into stocks for at least the first few months of 2010.  Like most professional investors, we see stocks as the most attractive investment option for 2010.

Let us look at the alternatives to stocks for investors.  In an environment where inflation is starting to resurge in many countries, bonds are in danger of declining in value as inflation pushes long term interest rates up in 2010.  Due to overleveraging and excess inventory, real estate is doing poorly in Japan, U.S., and Europe.  Collectibles are not in demand.  Private equity has performed poorly.  Globally, stocks and commodities are the investments of choice as we enter 2010.

Theme # 2 – Profits for cyclical companies will rise strongly.

Large companies in cyclical industries worldwide should do well as their global export business continues to pick up and corporate profits surge due to the high operating leverage inherent in cyclical companies.  Economically cyclical companies often have high fixed cost businesses, where a small change in revenues creates a big change in earnings due to their high fixed cost structure.  We expect revenues for many cyclical industries to rise in 2010; hence we expect their profits and stock prices to rise.

We especially favor companies which produce machines for building infrastructure, for installing new manufacturing capability, and for producing or extracting commodities.  Some of our favorite sectors are: machine tools, construction equipment, semiconductor, computer and telecommunications related companies, mining equipment, farm equipment, transportation equipment manufacturers and the suppliers to all of these industries.  The major manufacturers of these products are located Germany, U.S., Japan, Korea, Norway, and Taiwan.

Theme #3 – Inflation will resurge.

This is an easy prediction to make as inflation has already begun to resurge in those countries which are more honest about their inflation rates, for example, India and China.  On close observation, one will notice that inflation is already a burgeoning problem in some parts of the world.

Countries where economic growth has been slow to rebound in 2009 have understated their inflation rates to minimize their psychological impact of shrinking economic growth and rising inflation.  Those countries that have been reticent to tell the truth about inflation will eventually have to admit the problem as inflation becomes more pronounced in the second half of 2010.

Our regular readers know our view about the drivers of this inflation, about which we have written many times.  In short, inflation is caused by: 1) growth in the money supply and monetary base created via quantitative easing [printing money] and other methods, and 2) irresponsible fiscal policy.

Our favorite investment sectors that benefit from resurging inflation are; agricultural commodities, silver, gold, oil, copper, and timber.

We suggest that readers look closely at the suppliers to these industries, some of which are mentioned above.  Many of the companies who benefit from higher commodities prices are found in Australia, Canada, the U.S., and Latin America.


For investors in bonds, we recommend that investors own only short term bonds.  Perhaps the easiest way to make money on inflation is to sell long term bonds short.


We believe that those companies which need to raise money by selling bonds will be at a disadvantage as interest rates rise.  Those companies who can raise money through stock sales, or even better, companies who can generate cash from internal operations will thrive.

Theme # 4 – Well managed countries with strong growth in the last few years will continue to accelerate their growth

Fundamental investors traditionally look for the rate of change in earnings to determine which industries are most attractive.  Clearly, highly cyclical companies mentioned in theme #2 will benefit as a small increase in revenues translates to a big increase in earnings.

Companies and counties where growth has already been strong will only benefit if their growth rate accelerates even further in 2010.  In our opinion, this will happen in China, Taiwan, India, Brazil, South Korea, Singapore, and Norway.  Strong growth industries in these countries will be insurance, banking, infrastructure building, and retailing.


With respect to banking, although global banking will benefit from a period where interest rates are rising faster than deposit rates, European, U.S., and Japanese banks are deeply in need of continued capital infusions from public stock sales.  In our opinion, it will be hard to make money just owning bank stocks, but money can be made by trading them.  Well capitalized banks from other parts of the world should do well in 2010.


Early 2010 should be good period for stock market profits as stocks have little competition from bonds for investors’ assets. (Theme 1)
We recommend investors look at cyclical companies in Europe, the U.S., and Japan that are exporting to faster growing regions.  (Theme 2)

We also recommend investors look for companies that benefit from the resurgence of inflation in; Australia, Canada, Norway, Brazil, and the U.S.  Also, remember that higher interest rates mean longer term bond values are likely to decline.  Stay in short maturities when investing in bonds. (Theme 3)

Focus on foreign markets where growth rates are rising.  The fast growing economies of the world are outlined in theme #4.  Within these countries look for companies in infrastructure, banking, insurance, retailing and transportation industries.

We will reassess these themes as the year progresses.  We hope everyone has a wonderful holiday season.  Please call us if we can be of service.

Thanks for listening.

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