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January 1, 2006
Forbes on Fox Topic: The Hot New Investment Trends for 2006
Hot sectors happen when a policy or technology event materially raises after-tax returns on capital there relative to other assets. Investors move money from low to high return assets which creates capital gains for the guy who got there first. This is precisely the same thermodynamic process as a storm system (a gap between high and low pressures or temperatures) in physics. People can best understand it by looking at a weather map of these storms. (See the weather map on my website for several of these storms.) The reason I like the weather map metaphor is everyone already understandds it, and everyone also knows that a storm is TEMPORARY. The same is true for hot investments, i.e., you also have to know when to SELL them when the party is over.
Last year’s storms were:
1. Oil and commodity prices, both implications of China strong growth;
2. Small cap U.S. stocks caused by the gusher of liquidity for small companies that happened when the banks opened their doors to business loans again 18 months ago; and
3. The turnaround of Japan caused by the end of their 13 year deflation.
In 2006, the most interesting storms will be:
1. Communications technology. Congress will pass a new telecom law next year that will dramatically increase capital spending on new high-speed networks. At the same time, China, Korea, India and others are making massive investments in IT as a strategy for growing their economies without using more oil and gas. This is great for capital owners altogether, but it's especially great for telecom equipment makers and software writers. Best way to play that is EWY,the Korean ETF. (Korea is an important R&D provider for China.) Another is IWZ (the US technology sector).
2. The inflation monster will pull its scary head back into its cave next year and the Fed will back away from tightening (especially if we have a bad event at GM or Ford to prod them into providing liquidity). Investors will realize that inflation and interest rates will stay low so it is safe to buy the companies whose profits are growing more than 10% per year. The market will boom, especially for the small companies who rely on bank liquidity for working capital. Best way to play this is the Microcap stocks (IWC; the Russell microcap ETF) or the small cap ETFs (IWM and IJR).
3. We will get an extension on the dividend and cap gains tax cuts in January. Great for the overall market, but especially great for companies paying dividends (you can use DVY for this), or companies with big cash positions and huge free cash flow (maturing tech stocks like MSFT who can initiate dividends or pay special dividends.)
4. I also have sizable bets still in place on the China Growth stom system (EWY (Korea), EPP (Australia, New Zealand, Singapore, Hong Kong), on coal (BTU), and on Japan (EWJ).
As always, I own all of the stocks I mentioned above. (How could I tell readers I like a stock if I don't put my own money into it?)
JR
Posted by John Rutledge at January 1, 2006 12:51 PM
Comments
Hi John,
I just saw you on Kudlow and aggreed with a lot of what you had to say. In fact thats what prompted me to google you and led me to your blog. That being said after reading the above I cant help but notice how much you like ETF's. I would encourage you to take a closer look at the company I work for, PowerShares.
Take a look at these two products. PZI this is our Zacks Micro cap ETF. As I am sure you know historically the value side of micro caps have drastically out performed. Upon closer review you will see that IWC is VERY growthy where as our product is slanted much more towards value.
Secondly you mention DVY. This is a straight out income play. That being said our product PEY has a yield as much as 50bps higher and the beta is about half that as DVY.
I just thought I would draw your attention to our fund lineup. If you would like I can send you a full kit of everything PowerShares has to offer. After all we are the 2nd largest sponsor of ETFs.
Best,
Bryon Lake
Blake@powershares.com
Posted by: Bryon at January 20, 2006 5:52 PM
I thought there was telecom legislation passed in the fall of 2005 that would allow the baby bells to spend money on broadband and have that network not able to be used by competitors like their local networks. All this to compete with cable on a level playing field.
What further legislation is on tap for 2006?
Tom,
In 2005 the big development in telecom was a (very quiet) decision in the White House to support deregulation over the screams of the FCC. FCC also made some decisions that helped after that, but it is pretty easy for 5 guys (actually 4 guys at the moment) to change their mind. The new telecom act will happen in 2006. I am hopeful about its contents, partly because I am working inside the Senate to advise on the bills and see what's coming. Good for equip makers.
JR
Posted by: Tom Gates at January 5, 2006 12:47 PM
Hey John, which one do you like for $140. I'm very small time, so I want to invest in something that will make me money throughout the year as I add more into it. I'm looking at Microsoft because it seems cheap and they are positioning themselves to make waves in the industry again. But I could be convinced on a foreign fund.
Dave,
I like exchange traded funds more than indiv stocks because you are not going to wake up one morning and find out the CFO stole all the money.
For domestic funds I like DVY, big dividend and will benefit from a new tax law I expect in Feb.
For a foreign fund I would buy Korea (EWY) for the China tech bet, EPP (Australia, NZ, HK, S ing.) for the China capital market bet, or Japan (EWJ) for the Japan turnaround bet. Don't like Europe or Latin America. Oil too risky.
JR
Posted by: Dave at January 4, 2006 2:37 PM
Hi John,
As usual you cut through the nonsense and get to the point. Appreciate your views!
Tony
Thanks Tony. I appreciate your resading and commenting on the blog. My goal is to create a place where people feel free to talk about ideas the concensus guys won't deal with.
JR
Posted by: gharghur2 at January 2, 2006 10:09 AM