To profit by socio-economic changes one must understand the power vectors that sustain commercial advantage and market opportunities. Monetary strength does not depend on sober fiscal policy alone. Dominion in an increasingly integrated world defined by radical cultural, economic and demographic change depends on diverse matrices of power: diplomatic, media, military, tech and more. Those who buy assets embodying these matrices will profit.
I will begin by sketching the macro context and then proceed to guidance on key sectors to watch, companies to buy and remarks on outlook and timing.
One must grasp that "the era of contending states" as Spengler called it, and the high age of nationalism, its competition and contentions has been superseded. We have entered the "era of world peace and its formless wars." The residue of national identity most people feel is used by "the concealed powers that wield the collective" to get us to pay for and "consent to our servitude" as Aldous Huxley explained in his last public lecture. He also described how "the controlling oligarchy" uses media to solicit consent, to shape our view of reality, of self, relationships and investment: "to control and direct human behavior." Flags and ceremonies increase in number, frequency and scale even as their true influence on policies wanes. The freedom to think "has been replaced by a willingness to think to order" and to believe that scripted clichés are your own thoughts. Don't be a pod person: avoid the tube.
The contentions sold by the media are ideas that Nietzsche termed "idols of the marketplace." Do not be distracted from the process of wealth concentration that will result from fiscal policies and geopolitical games. The main near-term economic event is a major market drop in the US and probably worldwide. This will continue a process of wealth concentration and decline of the middle class. Those familiar with the McClellan Oscillator measure of advancing/declining issues and the theory of "Hindenburg Omens" know the indices are on shaky ground. Experienced and distinguished analysts and money managers quoted in closing emphasize this crucial point for portfolio strategy.
Our purpose here is to understand what this means for investment decisions, for choices that protect wealth. The main loci of power are financial, military, media-diplomatic, industrial materials and commodities ranging from fuel to food to precious metals. In terms of investment and markets, these powers may be grouped into several sectors:
* Aerospace-Military, Technology-Electronics
* Media (media, communications and entertainment, including sports: the ME, media-entertainment sector)
* Healthcare - Insurance (managers of human inventory)
* Mixed Industrials and Energy (producers, suppliers and transporters of Basic Materials)
* Commodities (agri-business, chemicals, miners, metals)
* Monetary (PMs, that is, precious metals, a subset of commodities intrinsic to financial power and the management of global competition)
These are sectors in which to be overweighted going forward. One can do this by buying individual companies or sector ETFs. For most people, a combination of the two is best.
Consumer Staples and Discretionary clearly are involved in several of these power vectors but in the mid to long-term they will become less important to those that run the social machine. The pending wealth consolidation events (we had a major one in 2008) will cut the strength of these sectors and of consumers generally. Healthcare is the one sector now strong that will flourish. It will become increasingly expensive and less humane. Overweight it, but wait for the pending 3Q correction to enter or to add to positions.
To sum up, there are seven sectors to overweight: the vectors of jousting between the triadic world system being created as East Asia is built up (by design of the West) and Western civilization taken down to facilitate re-shaping societies, trade relationships, oligarchic control of all systems and concomitant wealth extraction and re-distribution.
In my piece, "Buy Big Media on Dips" I identified the ME complex as a distinct sector. It is intrinsic to social (and individual) definition and relations, to political alignments, to the selling of narratives, products, notions of good and evil and distraction. Make your allocation in this industry by combining individual companies and an ETF like Vanguard's Consumer Discretionary (VCR). Disney (DIS), Fox (FOX), CBS (CBS), Discovery (DISCA), DirecTV (DTV), News Corp (NWSA) (NWS) and Time Warner (TWX) are the best plays. I reviewed their relative merits here.
In choosing specific companies, look first for revenue growth, the relation of cash flow to total debt (coverage ratio) and at debt/equity, the quick ratio and lastly, dividend and payout ratio. Also note scale of network coverage (literally) of events and the dominance of identity formation by ads and films. There already are and will be increasing mergers (like the TMZ live collaboration between TWX, FOX and more), official and implicit in this sector.
In aerospace-defense and tech I like United Technologies (UTX), Boeing (BA) and General Electric (GE). Don't worry about the latter's debt: the quick ratio, 2 is strong and the cash flow, $24 billion, smoothes out bumps. The debt helps GE avoid paying income taxes. It often receives a refund from the government. Lockheed Martin (LMT) also is good: its $4 billion cash flow nearly covers the $6.14 billion debt which is only .134 of $46 billion revenues. Thus its quick ratio of .8 is fine and government will smooth out wrinkles like negative revenue growth. General Dynamics (GD) has debt only .11 of its $36 billion revenues but is now at the top of its strong YTD run. Wait on it.
The case for this sector are the myriad crises in the world which a few small nudges by diplomacy, intelligence and media can ignite. That serves the eugenics agenda, too, a master policy for a century as detailed by repeated NY Times best-selling investigative journalist Edwin Black (previous link). Healthcare (VHT) will help manage the draw down of people as the Fed manages the indices with QE and taper talk. For creating the impact of the latter, indeed of all "informed opinion," media is critical. Grasp its socio-economic power and value as an investment.
In financials, JPMorgan (JPM), Goldman Sachs (GS), Barclays (BCS), HSBC (HBC), Bank of America-Merrill Lynch (BAC), Blackrock (BLK) and Deutsche Bank (DB) are the top picks. You can mix these with a position in the low-cost Vanguard ETF (VFH). Their top ten holdings also include Wells Fargo (WFC) and Citigroup (C) among others. The sector has been strong YTD so wait to enter or add.
Among industrials and basic materials Freeport McMoRan (FCX) looks increasingly good as a diversified global producer of energy, copper, molybdenum and gold. Its 60-40% partnership after 2021 with Rio Tinto (RIO), another top pick, at the Grasberg Minerals complex is a plus for both. RIO has just made two brilliant strategic moves to get its site at Oyu Tolgoi in Mongolia into Phase 2 development next year. I will discuss them in my next piece. Deere (DE) and Weyerhaeuser (WY) are essential companies with excellent basics at this time. DE has 9.5% revenue growth on $62 billion revenues, 1.3:1 over its total debt and a $4.3 billion cash flow with a solid 1.9 quick ratio. WY is growing revenues 24% on a $7.9 billion revenue base and has a good 1.4 quick ratio. Caterpillar (CAT) will be a key player: already it is one of a handful of foreign companies to have joint exchange facilities within China which again is ramping up its building projects. CAT has -16% revenue growth but its $60 billion revenues are 3:2 total debts and its massive $7.2 billion cash flow handles its .8 quick ratio. It is not going away. It is 75% below the top of its 52-week range and like FCX, DE and WY is a buy.
Given the renaissance in American natural Ggas, it is notable that GE and CAT are working on engines for earth-moving equipment, trains (locomotives) and more to tap this resource to lower costs and boost profits.
In the energy sector British Petroleum (BP) stands out for its size, geopolitical and financial sway (it began as Anglo-Persian Oil) and outstanding fundamentals. Its revenue growth is 6.6% on $400 billion revenues, 9x total debt. Its huge $39 billion cash flow, good quick ratio of 1 and 5.2% yield on 26% payout make it first among its "super major" peers of energy mega-caps. BP also owns 20% of Russian oil giant Rosneft (RU: ROSN).
At current prices consider owning some Corn (CORN) and Wheat (WEAT) or the agribusiness ETF (MOO) or grains (JJG). As mentioned in my recent piece on low "r" assets, fertilizers (SOIL) are near the bottom of their range. So is Uranium (URA). Massive building programs in the Middle East, India and China will boost the nuclear energy sector (NUCL). More than 60 plants are being built worldwide.
Finally, as monetary - technological commodities intrinsic to global financial policy, currency relations and an emerging revised reserve system, gold and silver are the top value buys in the key sectors reviewed in this article. The major miners, Barrick (ABX), Newmont (NEM) and Goldcorp (GG) will thrive as will the best mid-tier companies, Eldorado Gold (EGO) and First Majestic Silver (AG): the week of August 5-9 validated my discussions of their relative strengths. Tahoe Resources (TAHO) reported August 8 that it is on schedule and within budget (it is debt free) to begin producing concentrates at Escobal in Guatemala where it has 367 million oz. proven silver reserves (plus 37 million indicated) and 373k oz. of gold. In the near to mid-term, many of the mid-tier companies in this sector, like Yamana (AUY), IamGold (IAG), Kinross (KGC) and Silver Standard Resources (SSRI) are good as value plays that already are benefiting from significant cutbacks in capex and deferred development which will cause bullion prices to rise. The best junior producers like McEwen Mining (MUX) and Fortuna Silver (FSM) are sound. August 9 MUX reported record 2Q production of 21k gold oz. and 778k silver oz, 20% higher than Q1 production and a 44% Y/o/Y increase on 2Q 2012. Its all-in sustaining costs for gold equivalent oz. fell to $1108/oz. It has liquid assets of $39 million and remains debt free. Measured and inferred gold resources at El Gallo 1 and 2 in Mexico increased 34% to 2.1 million oz.
In sum: one should review the matrix of global finance, socio-economics and diplomacy to identify key power sectors and some of the best companies going forward. Over weight them but, except for PMs, wait for a 3Q correction to add equities. Expect PMs to dip after last week's rise. Retain an under-weighting in shorter term bonds that fits your risk tolerance and income stream and an ample cash position to facilitate buying when the impact of no-exit fiscal policies and damaged economic basics assert themselves. This is a good time to cash some gains. Jeffrey Saut of Raymond James expects a 5-10% correction this quarter ("market top is in: brace for correction"). Dr. Marc Faber expects a 20% decline through Q4 and Tobias Levkovich of Citi sees the S&P shedding 6% by New Years. Be prepared for buying opportunities.