that 5% inflation is baked into the cake, even though government stats don’tyet report it. Commodities of all kinds have increased 2-5 times over whatthey were in 2000 (when oil was $10 for a time). Much of this is offset by imports of cheaper manufactured goods from Asia. But going forward, importswill not get any cheaper (higher commodity input prices and increasingly higher labor costs are also a reality in China) and the higher costs of commodities will work their way through the world economy.
+ Sell REITs and any commercial real estate holdings; we are at the peak ofa 20+ year real estate cycle; REITs are now selling at prices that yield lessthan 5% on average, on par with risk free 10 year Treasuries; REITs will behurt by higher interest rates and an eventual economic downturn in 2006.Cash out now;
Hey, another good call! I haven’t changed my views on realestate, and won’t until we get those REIT dividend yields back to 8% likethey were in 1999 and 2000. All that is required is for real estate todecline relative to other asset classes and rents / revenues to increase.This will not happen for another 5 or more years. REIT yields are now lessthan super-safe 6 month T-Bills.
+ Stocks: the Large Cap Value sector is the last stop during a businesscycle. This was a good strategy in 2004 with a total (price + dividend)return on the Russell LC Value 1000 (ETF ticker: IWD) of 14.2%. Highdividend, high ROE and free cash flow, large cap, and slow growth stocks willdo well again in 2005; medical, insurance, energy, consumer staples(household) products, defense, are the place to be at the cycle peak andgoing into a business downturn (in 2005); expect another 10-20% return in2005 on this sector;
Okay, this one wasn’t perfect, but not bad either.Classic recession proof / defensive sectors like consumer stales and defensedid not do well because the economy held up well against all odds. Butdefensive energy and healthcare proved to be very good sectors for 2005, placing first and third out of the ten S&P sectors (utilities, another defensive sector was No. 2). I wouldn’t make any changes to this prediction,since I think we will finally see the economy weaken in 2006, though I havelowered my energy exposure since it has become fully valued at this time.Utilities, which I never bought, are also fully valued.
+ Commodities: given the direction of the dollar, a very good hedge is to owncommodities which will appreciate in $USD terms, as the dollar declines. Thebest way to own commodities is mutual funds or ETFs that hold companiesproducing those commodities. Additionally, many have significant dividends.See the following for recommendations.
This was perhaps my boldest and bestcall. Gold mining stocks increased over 40% in 2005 after years of doing nothing. All the commodities did well in 2005, especially the first half.We are in a bit of a pullback in most commodities as they have become over-owned, but I think this is a significant long term trend and will add to my positions on price weakness.
+ U.S. Bonds: because inflation is accelerating, stay very short term inbonds: less than 3 year duration on average and preferably Inflation-protected; Hi-yield or junk bonds are at cyclical high prices and will onlygo down, especially with increasing defaults at the next economic downturn;wait for the next recession to rebuild junk bond positions;
This was the proper recommendation for 2005, though the long bonds did not get hammered asexpected. So anyone who did not shorten duration or improve quality got abreak. Given the economic environment and the flatness of the yield curve asof this date (January 2, 2006), in 12 months, either long bonds will be at 5%and maybe much more, or we will be in a recession, at which point, short term
Leave a Comment