2011 Themes

2011 Themes

Municipal Bond Market is due for a correction

State and local governments, unlike the federal government, cannot print their way out of the financial troubles. With an estimated unfunded pension liability of $1-$3 trillion, declining revenues from lower property valuations, higher unemployment and thus lower income taxes, state and local governments are going to be in a lot of trouble in 2011.

Gold will definitely reach new highs

Although in the short term gold will have a meaningful correction, gold will reach a record high, probably in the $1700-$1900 range. Also, if due diligence is performed, many gold mining stocks will outperform the underlying resource itself.

Silver will also have a good year

If you like gold, silver is also a good buy. The most attractive thing about silver is that it hasn’t hit its nominal peak of $40 in 1982. As an industrial metal, it is used from electronics to special metallurgy to window panning. Moreover, the silver/gold ratio, although still not as cheap as before, it still makes silver a bargain.

Natural gas will likely outperform crude oil this year

Everywhere in the news media we hear about shale gas driving prices lower than before. For the past 2 years, natural gas has been one of the worst performing commodities. Many analysts are bearish on natural gas, which as contrarians encourages us. Lastly, the oil/gas price ratio is sitting at a 24-year high, making natural gas very attractive.

2011 will be a bad year for US treasury bonds

On November 2nd, when Ben Bernanke announced, “Quantitative Easing part II” (euphemism for money printing), he claimed that long-term interest rates would go down, but they have actually risen. More and more investors are catching up to the fact that investing in a market that has been in a bull market for 29 years is not a good idea. For the first time in a long time, corporate bonds from AAA companies are paying less than treasuries. More over, even foreign central banks are slowly reducing their holdings (either by outright selling or not buying at the same pace as before). A good example is China, which had a peak ownership of Treasuries in October 2009. Add to this fact the fiscal position of the US government with unfunded liabilities of anywhere from $40 trillion to $80 trillion, an overtaxed population and demographics problems with baby boomers retiring, and it’s certainly not the best market to be in.

Agricultural commodities

If you are a value investor, look no further than agricultural commodities, specifically rice, coffee, sugar. Even though they’ve hit recent intermediate highs, they are still the biggest bargain out there. Sugar hit at an all time high in 1975 of 55-56 cents per pound , and that’s in nominal dollars ( in today’s dollars, that would be $2.17/lb), sugar is currently selling for 33 cents. Coffee had its all time high in 1977 at $3/lb ($11.82/lb in today’s dollars) and now is selling at $2.40/lb. And rice is only 40% higher from its all-time low of $.10/lb. With weather conditions more unpredictable (droughts and floods more common) and inventories running very small, agricultural commodities and land look more appealing than ever.

Conclusion

From a value perspective, except for agriculture, nothing looks inexpensive, especially with the Federal Reserve printing money and depreciating the dollar. With the current market cycle favoring commodities for the next 5-10 years, and with a better price inflation hedge than stocks, commodities should certainly be in investors' holdings for the coming year. To sum up our thoughts for the new year, the best investments are agriculture and precious metals while the worst will be bonds.