THEMES FOR 2007
by Hans Wagner
January 12, 2007
Each year I like to formulate some investing ideas based on key economic trends. Here are my initial themes for 2007. As always they are subject to change as the economy and market trends change. In any case they provide a base from which to test investment ideas.
1. The U.S. economy will be weaker than the global economy, especially than the BRIC countries.
The slowdown in the U.S. economy from continued weakness in housing and autos will mean the U.S. will lag other rapidly growing economies, especially Brazil, Russia, India and China, the BRIC countries. However, the U.S. economy will continue to grow just at a slower pace than some of the emerging countries.
In addition the dollar will be flat or lower. The lower dollar will increase U.S. exports and should be bullish for U.S. large cap blue chip stocks. The increased exports will also mitigate the slowing U.S. economy.
Assets denominated in major foreign currencies will be flat to higher against the dollar encouraging foreign stock indexes. A falling dollar may cause commodity prices to rise, stimulating inflation, which will be bearish for U.S. bonds. However, if the economy weakens too much and enters a recession then short term interest rates will fall as the Federal Reserve will lower their discount rate.
2. The sectors riding the wave of scientific research and innovation will outperform the market overall.
a. Technology driven by convergence.
Convergence of voice, video, data and wireless will continue to drive opportunities in technology and communications. While convergence has been an industry watch word for years, we are experiencing the potential of new networks from the cable and old phone companies. Verizon and to a lesser extent AT&T are building fiber networks to carry all the services including video. The cable companies are offering bundled services of TV, phone and internet services. The race to capture the customer for these services is underway. Add in wireless and we have mobile convergence (the third screen, behind TV and computers) or the quadruple play. The capital investment required to achieve this vision presents significant opportunities to the providers of the equipment and services.
Companies such as Cisco (CSCO) will provide much of the hardware, while companies like Lamson & Sessions (LMS) will provide supporting materials (plastic pipe and covering for the fiber) that is being laid in most every city. Motorola (MOT) and Nokia (NOK) will be challenged to deliver hand sets that meet the needs of customers for these new services. And Apple (AAPL) is the wild card with move into mobile phones and home entertainment.
b. Aviation driven by new aircraft.
Demand for new aircraft that are more fuel efficient and meet the needs of developed and emerging countries will increase orders for commercial aircraft from Boeing and Airbus. Start up production of the F-22 and other fighter aircraft will also help drive opportunities for companies that can supply the necessary light weight materials and components such as titanium.
Allegheny Technologies Inc. (ATI) and Titanium Metals Corp (TIE) will experience growing demand for their products as these aircraft require more titanium than earlier versions.
c. Healthcare driven by growing market for services and drugs.
The aging population in the U.S. and the emerging middle class in the BRIC countries will drive demand for healthcare services. The large pharmaceutical companies will likely look to acquisitions to add to their stable of drugs. Growth oriented bio-tech firms such as Gilead Sciences (GILD) with a stable of patent protected drugs can be expected to continue to out perform the market. They even might be good acquisitions targets for the large pharmaceutical companies. Small drug companies such as Aspreva Pharmaceutical (ASPV) that have leading Earnings Yield and Return on Capital, have excellent potential.
3. Energy, especially growing demand from emerging countries and efforts to find alternatives to oil in the U.S. will present special opportunities.
Global demand for energy is growing as the emerging economies of the world continue to expand. Oil, coal, natural gas and bio fuels will experience continued demand. The U.S. is pursuing corn as the source for ethanol, however, a number of studies have shown that it takes as much or more energy to produce a gallon of ethanol. Also the U.S. government supplements production of ethanol by $0.50 per gallon. Not a very economic proposition. Therefore, expect other alternatives to begin to present themselves, such as clean coal, oil sands, oil shale, etc. Brazil uses sugar cane to proved most of their bio fuel, a program they began more than 20 years ago to help them become independent from imported oil.
4. Growing demand for infrastructure from the emerging countries will generate demand for key commodities and the companies that support this trend.
Emerging countries are building the infrastructure to support their economies such as electrical power, roads, buildings, factories, homes and transportation facilities. This will require use of many commodities such as copper, cement and steel as well as engineering know-how, technology and financing. While we have had a dramatic increase and recent pull back in the price of commodities, I expect the growing demand will re-ignite these prices in the future, possibly in 2007. Keep in mind that China is hosting the 2008 Summer Olympics and they are building at a frenzied pace to show the world they are a modern country.
5. Banking services, especially those that support the increasing global movement and investment of capital will be in greater demand.
There is a large and growing volume of capital seeking good returns. Much of this money is from countries that are exporters of commodities such as oil. Banks, investment banks and exchanges each offer potential to take advantage of this search for investment opportunities. Firms like Goldman Sachs GS), the New York Stock Exchange (NYX) and the Intercontinental Exchange (ICE) offer excellent growth opportunities.
© 2007 Hans Wagner
As a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website, Trading Online Makets, that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market