Investment Strategy in Today's Market

For the last of my "introductory" pieces, I would like to provide an overview of my investment strategy in today's market environment. In my previous entries, I outlined the major themes upon which I have focused in developing this strategy:

- Asian economic growth
- the secular bull market in commodities
- the risks of the Shanghai market bubble
- the fallout from the ongoing housing and mortgage problems
- the declining value of the dollar
- continuing, albeit weaker, economic growth in the US

How do I seek to navigate the confusing and contradictory economic waters described in the last few entries? Though the complete answer involves all five asset classes mentioned in my first post, I will focus here on equities and real estate (also in equity form). The way that I address the other classes, however, fairly closely mirrors the thought process for these two.

First, I seek to play the Asian and emerging market growth story - which I see as the primary bullish factor for the world economy - through investments in Asian region industrial, real estate, transportation, utility, telecom, and consumer issues. I am somewhat hesitant in the Chinese market, given its already inflated levels, though I was heavily invested there earlier, decreasing my exposure as P/E multiples continued to soar. In retrospect, I was perhaps cautious too early - as valuations continued to rise and are now even crazier - but I am not ready to jump back into that market in any significant way. Consequently, I am more comfortable playing this trend in other regional markets - Hong Kong, India, and Singapore, for example. The Hang Seng, among other things, has been the beneficiary of the impending move by the Chinese government to allow investment by mainlanders in the Hong Kong market.

Companies from outside the region are also benefiting from this major growth trend and the associated upward pressure on commodities - my investments include international corporations in the raw material, energy, and transportation sectors. Dollar weakness should only serve to enhance their profitability.

I supplement my Asian growth focus with a combination of investments that play to growth in other emerging markets - such as telecoms, utilities, and consumer goods - as well as some established international firms (in the health care, for example).

Domestically, I continue to play on the downtrend in the housing and credit markets, maintaining puts on selected REITs, homebuilders, and mortgage lenders. Once again, I feel there is another shoe (if not many more!) to drop in this story. MBIA's (MBI) recent quarterly results are one example of this. Countrywide's (CFC) $1.2 billion in third quarter losses are another (and, I suspect, their future expectations are a little too cheerful). I will only enter long positions in these sectors when it is clear that the current trends have reversed - this may cause me to miss the bottom, but I will go with the old warning against trying to catch a falling knife!

At the same time, being cautiously optimistic on the US market as a whole, since the Fed seems to have indicated that it will step in at the indication that things may get bad, I maintain exposure to technology. Looking to the future (and not willing to abandon at least one company I consider a solid value), I have also maintained a presence in high-quality financial issues.

This initial series of entries, hopefully, has provided a broad overview of my investment philosophy, the strategy that flows from my assessment of current conditions, and a general perspective on how I am implementing that strategy. As we continue, I will address individual equities and trades in more detail as part of the transaction portion of my commentary...