3 trends that hold true
Why start with the trends? Why not go straight to stock picks? In a volatile year, like 2010 or (as I project) 2011, the toughest challenge is staying invested. The second-toughest is knowing when to use the swings of the pendulum toward excessive fear to buy. (For more on this, see my column on investing when you fear the zombies are about to walk.)
You want to use market volatility to buy low -- and not let it send you running to the hills after you've sold low. The easiest way to do that is to indentify some longer-term trends that you want to own through a reasonable amount of volatility.
A big rally in 2011?
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What are some of those longer-term trends for 2011? Here are three.
* Food prices are headed higher, as are farm incomes. Speaking at the Bank of America/Merrill Lynch Global Industries Conference on Dec. 15, fertilizer company Potash of Saskatchewan (POT, news) said that by the middle of 2010 it had become apparent that, for the eighth time in the past 12 years, grain production would fall short of consumption and the world would have to draw down its stockpiles. In 2011, Potash estimates, it will take a 5% increase in grain production to keep pace with consumption. That will be a tough if not impossible task, because grain production has grown by only an average of 2% a year in the past few decades. Without a record increase in production, global grain stocks would fall to the historical lows of 2006 and 2007. That's certain to produce higher grain and food prices -- good for farmers and the companies that sell stuff to them but bad for consumers, especially poor consumers. According to the Food and Agriculture Organization of the United Nations, by November 2010 the year-to-year increase in the global food price index was 22%.
* Commodity prices are rising, and there's a real possibility of supply falling short of demand for such commodities as copper. Encouraged by this, the global mining industry is raising capital-spending budgets for 2011 and beyond as fast as it can. A survey of global mining executives by the Financial Times puts mining capital spending at $115 billion to $120 billion in 2011. That would be a record, surpassing the peak of $110 billion set in 2010.
Now, I can't tell you what the price of any commodity will be in 2011 -- too much depends on where the People's Bank of China comes down on inflation and growth in 2011. But I can tell you that mining companies are not going to cancel orders for capital goods on volatility in commodity prices, and they're going to be reluctant to cancel orders even on extraordinary volatility, because they're afraid of losing their place in the customer line. These companies remember from the last big commodities boom that supplies of capital goods are limited and suppliers can quickly ramp up to meet demand. Order early or forget about getting your order filled.
* 2011 is shaping up as a year of interest-rate stability -- or at least, a year when fears of interest-rate increases from central banks start to recede. The Federal Reserve isn't going to raise the short-term interest rates it controls in 2011. The European Central Bank won't raise rates significantly in 2011. Central banks in many developing markets are likely to finish their rounds of interest-rate increases in 2011. The People's Bank of China isn't much of a wild card -- the bank is signaling that if it raises rates at all in 2011, it will be little more than a gesture.
This doesn't mean that long-term interest rates, the ones central banks don't control, won't keep rising. In comparison to historical real rates -- that is interest rates minus inflation -- long-term rates are extremely low. So I expect interest rates at the long end of the yield curve to continue to move up. But that's exactly what should happen as the world's economies, especially the U.S. economy, return to something like the pre-crisis normal. (For more on the trend in interest rates, see my post "Higher interest rates, lower bond prices: It's a new world.")
In this world, bank profits should move up -- banks raise funds at short-term interest rates and lend at long-term interest rates. Add in falling default rates on consumer credit and mortgage loans, and some uptick in sentiment produced by whatever leaders in the United States and the eurozone contrive to deliver as gestures toward fiscal responsibility, and 2011 looks like a good year to be a lender
Now, I'll add some stock picks for 2011 to go with these trends.
* Higher food prices and higher farm incomes: farm equipment maker Deere (DE, news), fertilizer producer Yara International (YARIY, news), irrigation equipment maker Yara International (YARIY, news) and seed company Syngenta (SYT, news).
* Rising capital spending by commodity producers: mining equipment maker Joy Global (JOYG, news), tire and wheel maker (for mining and farm equipment) Titan International (TWI, news) and copper and gold miner Freeport-McMoRan Copper & Gold (FCX, news) because it has the ability to expand production at a modest cost. (For more on the capital spending story at Freeport McMoRan, see the Dec. 14 buy in "Higher interest rates, lower bond prices: it's a new world" for my Jubak's Picks portfolio.)
* Better times for banks: Spanish bank Banco Santander (STD, news) and U.S. banks Citigroup (C, news) and JPMorgan Chase (JPM, news).
These 10 picks won't give you a balanced portfolio. The group is heavily weighted toward commodities. To these 10, I'd look to add technology, where I favor chip equipment makers such as ASML Holding (ASML, news), transportation equipment makers such as Cummins (CMI, news), and consumer goods companies such as Google (GOOG, news), Apple (AAPL, news) and Amazon.com (AMZN, news)
