2009 Trading Plan Sketch

In Thoughts for 2009, I put to bits my current expectations. But what to do with those?

As for US equities, early cycle beneficiaries are usually consumer discretionary, financials, and transports. I also like the agricultural sector.

Given that the US consumer is undergoing a secular trend change toward increased savings, I'd expect that a recovery in consumer stocks will be later than we've seen in prior downturns. Consumer staples (XLP) will continue to outperform consumer discretionary (XLY) until 3Q or 4Q. Retail (RTH) takes a beating in 1H.

The financial industry has significant structural problems that will impair its earning potential for several quarters: a rolling wave of defaults is moving through residential mortgages, revolving credit, commercial mortgages, auto loans, etc. While the Fed and Treasury have provided some relief, provisions for loan losses, write-downs, and leverage reduction will continue to be problems until well into 2010. That being said, I've seen several articles outlining a potential windfall for buyers of synthetic CDOs should one or two more large multinationals have default events. Which is to say, JP Morgan, Citigroup, Wells-Fargo, and Goldman Sachs (JPM, C, WFC, GS) might suddenly receive hundreds of billions from the writers of synthetic CDO protection. (Surprisingly, those entities are insurance companies, pension funds, foundations, etc; it's complicated.) Furthermore, everybody knows the financial industry is in trouble, and that there will be problems for the foreseeable future. Lastly, should the Fed be successful at fighting this little bout of deflation — and there's no reason to think they won't, cf Zimbabwe — the financial industry will be the first and largest beneficiary. Based on contrarianism, value investing, and the business cycle, the time to buy XLF is approaching (and, in fact, may well be here).

As for transports, we've had a tremendous crash in shipping volumes and shipping rates in the past few months. A lot of this is priced in, but we probably won't see the worst of it until the 4Q numbers come in. Since it's my view that agricultural commodities will be one of the better plays next year, as a direct corollary, I also think that bulk transports will be the better play among their brethren: ships, either dry bulk (ESEA, PRGN, NM, SB) or petroleum tankers (FRO, GMR, NAT, OSG, VLCCF), and trains (CSX, UNP, BNI). For airlines, I prefer the low-cost carriers like Southwest (LUV) and Jet Blue (JBLU), rather than the traditional carriers which are hampered by higher fixed costs and contracts last negotiated during the late 90s frenzy. Trucking, like consumer stocks, I think will be a little late getting to the party this time.

As for agricultural issues, there are many: fertilizer suppliers, like MOS and POT, equipment companies like DE, a host of distributors, processors, service providers, yadda, yadda, yadda. As a general rule, I stick to ETFs, simply for the reason that I lack the time to analyze balance sheets for everything; it's another example of the aphorism, 'safety in numbers.' I like MOO and DBA or DAG.

Global equities, broadly brushed, will recover first in the resource exporting countries. I like Brazil, Australia, Chile, and South Africa (eg EWZ, EWA, ECH, and EZA). Russia and Canada (RSX and EWC) will come back a little later, once expectations of higher oil prices return. I also like Argentina, though I've yet to find a satisfactory vehicle to exploit that.

Currency ETFs are a great way to play foreign exchange rates. As I wrote previously, I like Yen, Euro, Real, Kroner, and Ruble, but the Ruble and Kroner are not yet offered as an ETF. That leaves Yen, Euro, Real, and I'll add Rand for kicks: (FXY, FXE, BZF, and SZR). In 2H, I like Australian and Canadian Dollars (FXA and FXC). Lastly, a short dollar fund to finish (UDN).

US Treasury rates reflect present deflation, pessimism about equities globally, and vendor financing by both Asian manufacturing and oil exporting countries. The first will be with us through mid-year, and the second will fade out not much after. The last will be with us for some time to come. When deflation hits the cover of Time magazine, it will be time to short Treasuries. Two ETFs provide that option: TBT for 20+ year bonds, and PST for 7-10 year bonds. I also like BWX, an international sovereign bond fund. That will be a good counter dollar play while we have deflation and generally low growth.

As for commodities, there are so many to choose from now, eg. I like agriculture in 1Q, energy in 2Q, other materials in 2H, and precious metals all year.

At least, that's what I'm thinking right now.