4 Sectors for a Profitable - And Protected - Portfolio

by: Generation Consulting

Recently, I wrote an article about oil with the premise being, if you’re an investor willing to buy US Treasuries (“every human being should be short government debt” according to Nassim Taleb), you’re better off in oil equities (higher returns, future proofing, and possibly, even less risk if you account for inflation). Someone commented that I was ignoring diversification, and technically, he is correct.

So what I want to do with this article is create a portfolio that beats the returns of the 10 year US Treasury (the benchmark for a successful investing), or the 3% to 5% returns that Bill Gross (manager of PIMCO - the world’s largest bond fund) declares as the “new normal. However, I want my portfolio to ride future trends (for potential capital gains), hedge against potential risks, and be extremely defensive (as the world is as unsure as ever).

This portfolio should return 4% consistently and have little chance of blowing up in the upcoming years; you know, the portfolio your financial advisor should be creating for you if he actually cared about you and wasn’t shilling whatever the recent investment bank prospectuses told him to do.

My article rests on three critical economic assumptions about future risks, all of which I wish to explain so the reader can decide whether or not he agrees.

1) The emerging markets are in a bubble, or will be in a bubble. I know, I know: “China has a billion people, they’re all going to want cars, houses, etc.” But with one thing I want to stress, with growth rates between 8%-10% since the 1980s: If countries like China are not already in a bubble, people will invest into it until it becomes a bubble. From what we know about human nature, will there ever be a point in which people will stop exploiting an arbitrage until it is completely exhausted, or rush into an investment until it completely overheats?

The portfolio I want to lay out will invest into these trends, without actually having to invest in a country led by a dictatorial elite, with opaque reporting, and major demographic issues (the United States not included). If you still desire to invest directly into these markets, I hope these graphs give you some second thought (click some images to enlarge):

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More charts here. But hey, as we all know, we've managed to defeat the traditional boom-bust cycle of classic economic history, and now exist in a "Goldilocks" economy. No wait, that is 2007 talking. Guard yourself.

2) Any significant slowdown in the “industrialized nations” will be accompanied by a debt and/or currency crisis. Not a ridiculous assumption, considering countries like Great Britain are leveraged 4-to-1, and US debt as percentage of GDP levels are as high as they were post-World War II despite not benefitting from all the demographic, geopolitical, and economic advantages we enjoyed during that period. Simply, the United States’ and Europe’s debt level are out of control, and the United States’ won’t have its $130 trillion in liabilities and debt straightened out until there is a debt crises, or if it isn’t, we will have massive inflation (QE, QE2 QE3,… QE5) and devaluation of the dollar.

Simply put, if the economy tanks, we won’t be able to pay our debts – or will struggle to. Furthermore, FX trading has gone bonkers (look how quickly the USD, EUR, JPY, etc. have all moved against each other the past two years) and a wrongly timed investment in the wrong country could implode your portfolio. As always, charts!:

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Or if that doesn’t kill us, inflation will:

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Now that's new money! Yeah, I know: watching your savings dilute isn't funny. Now let's invest in profitable, future-proofed sectors that guard against these potential issues.

3) Global assumptions. Oil will not be replaced anytime soon (a fair assumption and in that case, everyone is making money anyway). Government finances will not be straightened out in the near future (until I see a budget surplus that doesn’t destroy the economy, you should feel safe in gold). Healthcare will not be nationalized (not just Obamacare, full state-run programs).

Fair enough?


  • Trend: Industrialized Aging
  • Hedge: Pretty much everything, defensive sector in case of any economic problems.

It appears the modern man needs five things: food, water, shelter, a cell phone (telecoms risks disruptive technologies), and healthcare.

Please tell me any sector, generally regarded as defensive, that is essentially guaranteed to rise almost exponentially- in both terms of costs and customers. I love it, Warren Buffet loves it, and the Congressional Budget Office fears it. Unless 70 million baby boomers decide to die rather than get old, it’s a sure fire trend to invest.

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Though this looks like a bubble, and it will pop one day (after 2060), I guarantee like most bubble it will go on longer than anyone expects and cost much more than originally thought ("Dad, I love you but..." - kiddding! dark humor!)

Let's include obesity rates as well:

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Here are some of the Click to enlargeconditions associated with obesity: Twice as likely to develop diabetes, cholesterol issues, etc. I was going to search for statistics that demonstrate the increased costs linked to aging and obesity but I am sure everyone can just take my word on it that a fatter, older population requires more healthcare than a skinny, young population. They are both much more ikely to develop chronic conditions, which in health care companies' views, are cash-cows. This is possibly why healthcare costs are predicted to explode in the upcoming years:Click to enlarge

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It's not sexy (old and fat usually isn't--- kidding again!), but more money is going to be flowing into healthcare, as percentage of GDP, than consumer goods or whatnot.

Potential Stocks/ETFs:

  • PFE (Pfizer) - 4.2%
  • SNY (Sanofi)- 3.5%
  • GSK (GlaxoSmithKlein)- 4.6% *
  • JNJ (Johnson & Johnson)- 3.6%
  • ABT (Abbot)- 3.4%
  • NVS (Novartis)- 3.0%
  • MRK (Merk)- 4.2%
  • BMY (Bristol-Myers)- 4.7%
  • LLY (Eli Lilly)- 5.5%
  • UNH (UnitedHealth)- 1.4%*
  • MDT (Medtronic)- 2.7%
  • TEVA (Teva) 1.2%
  • WLP (WellPoint) N/A*
  • BDX (Becton,Dickinson, & Co) - 2.1%
  • VHT (Vanguard Health Care ETF)- 2.93%
  • XLV (Healthcare SPDR) - 1.95%

* - Buffet stocks


  • Trend: Third World Growth, Growing Oil Demand, Supply Limits
  • Hedge: Dollar Devaluation, Inflation, First World Debt-Crisis, Personal Expenses

I liked it last week and I still like it. I don’t want to repeat what I hammered in earlier but to sum it up. Growth in oil demand is still four times the growth in supply. Most peak oil estimates are still between 2010 and 2020. Exxon is still the most profitable institution in the United States of America (profits more than the federal government) and still takes in more revenues than three Californias. Ben Bernake is still trying to go all deliverance-like on the US dollar. A barrel of oil is still traded in US dollars, and the inflation adjusted price of oil still has risen faster than the official US inflation rate (completely uncooked, of course) in the past thirty years. This chart is still remains true:

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And my favorite “oh, shit” chart!:

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And the way Barack Obama, a environmentalist Democrat, pretended to be outraged at BP all the while covering their asses, just shows how vital energy is to national security and the domestic economy.

As a hedge, any inflation will be reflected in the price of a dollar (again, more than the actual cooked inflation rate). If the United States falls into another economic crisis, due to the doubling of the national debt in two years to 14 trillion, it will surely raise the possibility that the United States will be unable to service its debts without inflating the currency. As the United States imports more than two-thirds of its oils, oil exporters will surely want more dollars to compensate for that risk. Thus, the price of oil should not fall collapse as it did in March 2009. And even if it does, relative to the S & P index, Big energy outperformed other sectors by large margins.


  • XOM (Exxon Mobile) - 2.9%
  • COP (ConocoPhillips)- 4.0%
  • RDS.A (Royal Dutch Shell) - 5.9%
  • TOT (Total)- 4.7%
  • CVX (Chevron)- 3.6%
  • STO (Statoil)- 3.7%
  • MUR (Murphy Oil)- 1.90%
  • CEO (CNOOC)- 2.6%
  • PTR (Petrochina)- 3.0%
  • SNP (Chinapetro)- 3.4%
  • PWE (PennWest)- 9.2%
  • ERF (Enerplus)- 8.7%
  • ECA (Encana) - 2.8%

Multinational Cash Cows

  • Trend: Globalization, Global Growth
  • Hedge: Currency Devaluation

I’m creating a new category. These companies make a lot of money, in a lot of different currencies, pay high yields, and didn’t get the shit completely beat out of them in either 2007 when the dollar got whipped and in 2009 when everyone got whipped. These don’t provide you “defensive growth” like oil and health care, but provide stable income (that beats Treasuries) and currency and portfolio diversification:

  • MCD (McDonald’s)- 3.0%
  • YUM (Yum! Brands)- 1.8%
  • PG (Procter & Gamble)- 3.2%
  • JNJ (Johnson & Johnson)- 3.6% (Again)
  • KMB (Kimberly-Clark)- 4.0%
  • PM (Phillip Morris International)- 4.7%
  • KO (Coca-Cola)- 3.0%
  • CL (Colgate-Palmolive)- 2.8%
  • PEP (Pepsi) -2.9%


  • Trend: Money Printing (QE to Infinity)
  • Hedge: Anything and Everything, primarily, geopolitical concerns, hyperinflation, and debt crises

The global economic situation is arguably more perilous in 2011 than 2008 as the earlier charts display. In 2007 people defaulted. In 2008 banks defaulted. In 2011, if there is a slowdown, nations should start defaulting. Look at the credit default swaps (bets on bankruptcies) in Europe. The writing is on the wall; CDS on Greece are as high now as they were when Greece was pouring over the news in April. European banks, which are structured differently than US banks and hold a ton of European sovereign debt, are raising new capital. As Phoenix Capital Research pointed out on zerohedge.com, European banks are doing the same “all is well, we don’t need to raise capital but we’re going to do it anyway – nothing to see here” that we saw in 2008.

If the United States and Europe are somehow able to spur economic growth and avoid a double dip, with the increases to the money supply, the Fed Funds Rate at .25% to infinity, and all the quantitative easing programs, it is extremely likely in my view that inflation will accompany global growth (more than the 4% we saw during the 2000s that drove the price of gold from 280 in 2000 to 1270 currently).

It should be the smallest percentage in your portfolio, but it’s a hedge against a global collapse of fiat currencies and against inflation. Don’t trust me? Soros owns gold. John Paulson owns gold. Alan Greenspan advised Paulson to own gold. Eric Mindich owns gold. Michael Burry owns gold. Nassim Taleb owns gold (“By staying in cash or hedging against inflation, you won’t regret it in two years.”). David Einhorn owns gold.

If all of these famous investors, all of who are a lot smarter than me, who have access to a lot more (inside) information than I do, and manage much more money than I ever will, were investing their own money in human poop – I would invest in human poop.

These investments all allow you to beat the 3% benchmark, while betting on future trends and protecting yourself. Healthcare and Oil lets you get defensive while betting on clear trends. Oil and gold hedge against inflation. Multinational cash cows provide currency and portfolio diversification while beating US Treasury yields.

  • GLD (Gold ETF)
  • GDX (Gold Miner ETF)
  • GDXJ (Gold Miner ETF on Steroids)

I wouldn't invest directly into a minor, there are way too many risks (see: AngloGold).

If its not defensive, anything else should be considered speculation. I can with a fair certainty that the United States is going to get older, that oil demand will keep increasing, and that there are major stresses on the world's currencies. This is fact that one needs to protect against.

But if you want to speculate, I would set aside 10%-15% and pick individual companies that you feel are great. I speculate by the “1st time I use it and love it rule” Very simple. If I hear about a new product, use it, and I love it – I will invest in it. Also known as the “if only I had” rule…

  • If only I had invested in Apple the first time I bought an iPod.
  • If only I had invested in Underarmour the first time I wore that shirt.
  • If only I had invested in RIMM the first time I bought a Blackberry.
  • If only I had invested in Netflix the when I signed up.

Feel me?

If you like my articles, please follow me on Seeking Alpha. I want to write articles ragging on individual stocks and humor articles about the Federal Reserve (i.e. things no one reads). It’s a great motivation for me to stop playing Halo: Reach and actually put pen to paper knowing I’m not the only one laughing at my stupid economic humor (yeah… I know).

Disclosure: Author is long XOM, PFE, MRK, CVX, GLD and is long multinational cash cows through mutual funds