I’ve discovered a new oxymoron to join the ranks of those often used in bouts of humor such as “a fine mess” or “second best” or “pretty ugly”; namely, “Free Trade”, as in “Free Trade Agreements”.
I participate in an online discussion group focused on foreign policy issues and in the past few days, there has been a great deal of talk about recent trade deals, both of the formal variety such as the South Korea-US Free Trade Agreement (KORUS FTA), and of the less comprehensive type such as the major deals that US companies inked with India on President Obama’s November trip. The discussions have revolved around a number of issues:
What does this have to do with “actionable trade ideas” that are more suitable for this site? In a word, everything. As I’ve stated in numerous articles in the past, investors are best equipped to opine and decide on their investment choices if they include in their analysis a global view of events that can impact overall economic growth, specific company revenues and profits, and of course, trade related issues that impact imports and exports. Again, as readers will know, my portfolios have been built around a global view that sees meaningful sustainable growth in various spots around the globe, most notably in Asia and Latin America (and increasingly in Africa in specific industries/sectors). Around that view, I’ve targeted companies that are exposed to those opportunities, both US companies that are penetrating those markets, and domestic companies in the respective regions who are leaders in their space and have acceptable (to me) degrees of corporate governance and transparency of operations.
I’ve also been constructive on the US as economic data has started to show signs of a bottoming, if not pickup, in activity. In addition, tax cuts appear to be in the offing, QE2 (maybe 3) continues to pump up liquidity, and companies are about as lean and mean as they’ve been in some time, leaving them prone to start hiring once demand picks up.
That said, there are headwinds that are likely to continue preventing markets from straight-lining to higher levels, such as the debt stresses of European sovereigns and banks, the China “foot on the brake” fight against inflation, and the US municipalities who are increasingly being talked about as being the next big candidate for a federal bailout. On top of all of that, there remains the possibility of escalation in the Korea conflict, a potential for the US bond rally to unravel causing a spike in rates, and the ever present threat of a major terrorist event.
So, how am I positioning in this environment? Before answering, please note that everything in this article is solely meant to be thought-provoking, and is in no way meant to be taken as personalized investment advice. Each investor has to decide for themselves as to the relevance of comments made here to their unique investment goals, financial profile and risk tolerances.
In sum, I have continued to shift the weighting more in favor or Consumer Discretionary stocks vs Consumer Staples. That doesn’t mean I’m vacating the latter space, but new money is going to stocks such as Lowe's (LOW) and Stanley Black & Decker (SWK) rather than Campbell Soup (CPB). Along the same lines, I’ve been adding to Materials and Industrials such as Nucor (NUE), Alcoa (AA), 3M (MMM), United Technologies (UTX) and Waste Management (WM). In the Tech space I’ve added Intel (INTC) and EMC (EMC). In Energy, Schlumberger (SLB), Halliburton (HAL) and Devon Energy (DVN). In Healthcare, I’d added Abbott (ABT) and Teva (TEVA). Despite my general ambivalence towards Financials in general at this time, I maintain a position in Citigroup (C) and have added Hudson City (HCBK). In REITs I’ve added Senior Housing (SNH) and Omega Healthcare (OHI). Finally, in the Utilities space, I’ve added ConEd (ED), Exelon (EXC) and Duke (DUK). Also on my shopping list are some Emerging Market plays such as China (FXI and HAO), Australia (EWA), Brazil (BRXX) and the diversified EM ETF (EEM).
This list is not all-inclusive, but is meant to give some idea of the kinds of companies that collectively, I believe, start to represent a well-diversified portfolio of global businesses that are likely to benefit from the world view I mentioned above. Some of these companies are also likely to be impacted, some directly, some indirectly, by the recent trade deals with Korea and India, and others that are under discussion. To sum it up, it would be “pretty ugly” to “think out loud” about “stunted growth” in the US and be “deliberately thoughtless” about “somewhat awesome” global opportunities that might result in “incredibly real” results if things play out absent the “normal deviation” from “expected serendipity”.
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