Position disclaimer: At the present time I am long Gold, Crescent Point, Qualcomm, and Alcoa. I have no positions in the other securities mentioned.
Charts: I would like to thank sharelynx.com, the World Gold Council, Haver Analytics, and Gluskin Sheff for the Dow-Gold and Dow-S&P charts used in this commentary.
2011 will likely start a bit bumpy as the market works off its overbought condition setting the stage for a nice rally to begin in February leading up to the end of QE2 sometime in the second quarter. The second half of 2011 should feature a sideways move into 2012.
I think Financial stocks will continue to underperform. Looking back after the tech bubble many companies never saw their stock prices recover (Cisco, Intel, Dell, Yahoo, and Microsoft are examples). There are still a number of questions concerning foreclosures and a black swan in terms of the balance sheet pricing from the FASB/IFRS.
It is possible that financial stocks begin to outperform but investors need to pick through the sector with care. Do not think that just because the stock is beat up it represents great value. Underperforming stocks are generally underperforming for a reason.
There will be select buys at the regional level but the large money center banks with significant mortgage exposure will likely see continued difficulties in 2011.
Technology in select areas should do very well.
Companies tied to Android rather than Apple in the cellphone/tablet area as Android has matched Apple in terms of OS penetration in the smartphone sector and appears to be well placed to make significant inroads in the emerging tablet sector.
Google may be on its way to winning the smartphone/tablet OS battle segmenting both Apple and Microsoft but it is early yet and the real winner may emerge over the next two years.
In this sector I like Qualcomm as a play on Android.
I continue to like both Gold and Silver in the hard commodity area after a short correction in January. Gold has an absolute floor at $1265 with $1500 being the upside.
For investors wondering when to sell Gold I would like to introduce the following chart showing the Dow/Gold and S&P/Gold ratios.
For my personal portfolios I am using the following ratio system, 5:4:3 for the Dow and .5:.4:.3 for the S&P.
When the Dow/Gold and S&P/Gold ratios reach 5/.5 sell one-third of your holdings, another third at 4/.4, and the final third at 3/.3. Any holdings below 3/.3 should be met with tight stops as this will likely be the mania phase where volatility reigns supreme.
Investors should implement proper risk management systems in order to manage their risk with respect to increased volatility in the Gold/Silver sector.
In terms of Gold and Silver stocks the exploration sector provides the most upside over developers and producers so long as investors look for properties in well established mining districts in safe mining jurisdictions. These properties continue to offer very good value.
The theft of $2 million in Gold from a mine in Brazil should highlight the risks of dealing in Emerging Markets, even ones as advanced as Brazil.
Oil companies with solid dividend ratios continue to be attractive. The same goes for oil service stocks. Strong dividend yields and cash flows should protect investors on the downside while providing a nice additional return on capital. Crescent Point Energy is a very attractive Canadian oil producer who just switched from being a trust to a corporation in Canada. Crescent Point owns a significant portion of the Bakkan oil reserve in Saskatchewan just across the border from the United States.
The substitution effect should begin to take effect in 2011 as high primary commodity prices force investors to seek cheaper alternatives. This has already taken effect with respect to Gold as investors rushed to Silver in the 4th quarter as a cheaper alternative to Gold causing the Gold/Silver ratio to move to pre-financial crisis lows.
As a contrarian trade I like Aluminum over Copper. There are a significant number of people on the long side of the Copper trade and with the price above $9400 Aluminum looks like a bargain at its resistance level of $2500. A move above $2500 would signal a rally to the market. Alcoa, one of the largest global Aluminum producers, has already broken through initial resistance anticipating a move in Aluminum.
The soft commodity sector is especially attractive right now. Agricultural producers in the sugar, palmoil, and soybeans sectors all look attractive for a variety of reason. Palm oil especially as a biofuel in Asia as oil prices rise putting a strain on economic growth.
Fixed income yields should continue to rise until stocks top then fall into the end of the year with the top in yields coming when QE2 ends.
Looking out over the year it appears as though the trade will be long equities until QE2 ends then switch into fixed income securities in the second half of the year.
Manage risk appropriately in this environment. As we saw with the flash crash last year corrections can come quickly and with force. This is a stock pickers market and even in the areas I cited above a rising tide is not lifting all boats.
Just because I mention a stock that I may like or hold does not mean it is appropriate for the reader. As always, do your OWN homework and come to your own conclusions before investing.
Companies like Microsoft and Intel have not had the same returns as companies like Apple and Google. In the Gold sector, juniors producers and stocks like Pinetree Capital have outperformed their large cap producer brethren like Goldcorp.
There are great values in the market waiting to be found if investors are willing to kick the tires and turn over some rocks and stones.
Investors need to manage risk appropriately and do their homework in the respective sectors in which they invest. The landscape in every sector is changing rapidly and companies that were hot and hold dominant positions are seeing those positions usurped by new entrants that are less than a decade old. Some of the new entrants have yet to go public but hold dominant positions in emerging and established industries.
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