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The Three Best and Worse Investment Sectors for the Next Five Years

Stock-Markets / Investing 2009 Jul 06, 2009 - 07:25 PM GMT

By: Uncommon_Wisdom

Stock-Markets

Best Financial Markets Analysis ArticleLarry Edelson writes: I often get the question, “Larry, what do you think will be the best and worst sectors to invest in for the next five years?”

So this morning, I’m going to answer that question. For many of you, my answer won’t come as a surprise. For many, it will. Either way, it’s important you know my longer-term forecasts.


So this morning, I’m going to answer that question. For many of you, my answer won’t come as a surprise. For many, it will. Either way, it’s important you know my longer-term forecasts.

Keep in mind, my long-term forecasts don’t change very often, chiefly because the major trends we’re witnessing are almost etched in stone, resulting from powerful economic and investment cycles that no one can alter. Not even Washington or the Federal Reserve.

And I think it’s clear that given the state of our economy and financial markets, there are a lot more lousy investments than there are good ones.

But don’t worry: It’s not all bad. There are plenty of great investments out there. Plus, today there are a myriad of ways to even make money on lousy investments — via instruments such as inverse ETFs and more.

So, let’s get right to what I believe are the worst three, then the best three, sectors to invest in for the next five years …

The Three Worst Sectors For the Next Five Years

These are major asset classes where I believe — based on all my indicators and analysis — you will either …

Suffer massive depreciation in the purchasing power of your investment. You may get a nominal rate of return of say 5 percent or 6 percent, but after accounting for the “real” rate of inflation — and yes, there is still inflation out there — you will be losing purchasing power.

Or …

Incur the worst of both worlds: Lose in terms of purchasing power AND in terms of the nominal value of the dollars you invest. In other words, you could invest $10,000 today and get back only $5,000 at the end of five years. But that $5,000 you get back in five years is only worth $2,000 in terms of purchasing power (because of the falling dollar).

So what are the sectors where you could get absolutely hammered over the next five years?

Worst Sector #1: Long-term Bonds

I mean corporate, municipal, bonds of Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac, longer-term U.S. Treasury bonds, and long-term sovereign bonds of other countries.

The reasons are pretty simple: It’s going to take years for the world to recover from the current financial crisis and the damage it’s done.

All the while, there will be loads of uncertainty surrounding the bond markets. Uncertainty due to the unprecedented crisis the world is going through, not to mention massive price pressure on bonds due to the veritable tsunami of government bond offerings that are coming down the pike as governments everywhere borrow money like crazy to try and stimulate growth.

At times, all this will come through in the form of sharply rising interest rates, meaning the principal of the bonds will have to decline.

At other times, it will arise from the lack of liquidity now surrounding the credit markets, the falling value of the dollar, uncertainty in corporate earnings, companies going bankrupt, and more.

No matter how you look at it, all of these forces will negatively affect the value of most, if not all, bond markets — and cause you to incur massive losses.

The worst bond investments of all, in my opinion, will most likely be the U.S. Treasury bond market. Five-year and longer-dated Treasuries.

Reason: Washington has to borrow an estimated $3 trillion over the next two years, and there’s simply no way that the offering of those IOUs is going to do anything but depress bond prices.

Plus, U.S. Treasury bond prices are inextricably intertwined with the value of the dollar and its perceived credit-worthiness.

As we all know, the dollar is not what it used to be. A long time ago, it was backed by gold. Then it was backed by the full faith and credit of the U.S. government. That wasn’t so bad, until the credit crisis hit.

Today, the faith part is losing respect all over the world.

And the credit part of the equation is also crumbling as Washington bails out one company after another, printing paper money like crazy, and accepting junk bonds as collateral.

In fact, I estimate that as much as 40% of the Treasury’s balance sheet is now comprised of junk bonds. That devalues the dollar and the Treasury bonds that are issued based on the dollar.

So I strongly suggest you stay away from the bond markets. Period. Their prices are only going to fall as interest rates are forced higher by investors willing to lend governments and companies, and even municipalities, money, but at much higher yields.

You don’t want to be in bonds as that process unfolds. Indeed, U.S. Treasury bonds have already plunged more than 12%, just since the start of the year.

Instead, consider buying an inverse position on the bond market when bonds offer up a rally, a good time to effectively go short the bond market, with an inverse fund such as the Rydex Inverse Government Long Bond Fund (RYJUX).

Worst Sector #2: European Stock Markets

Yes, the euro currency is very strong. And it could get even stronger as the dollar continues to head south in its massive, long-term bear market.

But a strong euro isn’t good for Europe (a strong currency isn’t good for any country right now).

Strong currencies import deflation into a country, and when you have systemic, antiquated kinds of institutions … a fractured central banking system … a barely 5-year old constitution … and more than $1.7 trillion in estimated loans hanging out to flap in the wind issued to countries such as Russia and older Eastern communist-bloc countries such as Bulgaria, Poland, and Romania — a strong currency is a killer for the economy.

For a variety of reasons based on substantial objective research, I believe Europe’s economy and stock markets are headed into two lost decades, much like Japan has experienced.

Bottom line: I’d steer clear of Europe’s markets with a 10-foot pole. And instead, as I noted with bonds above, I’d look to buy an inverse ETF on Europe, with the goal of profiting from Europe’s long slide into as much as two lost decades of sinking into the mud. An inverse ETF like the new ProShares UltraShort MSCI Europe ETF (EPV), an ETF that is designed to rise when Europe’s markets fall.

What about U.S. stock markets? They’re likely to head lower again, once the current bear market rally is over. But remember, we’re talking mainly about the next five years. And five years from now I expect the Dow Jones Industrials will be at new record highs (in nominal terms) — whereas I believe Europe could be at new record lows!

(I’ll have more on this in an upcoming Real Wealth Report issue. So be sure you’re a subscriber. The report will shatter everything you thought you knew about economics … the dollar … deflation … inflation … and more.)

Worst Sector #3: The U.S. Dollar

Don’t get me wrong, I am not being unpatriotic. But a strong dollar is the last thing the United States needs now.

Instead, it needs a weak dollar. Federal Reserve Chairman Ben Bernanke knows this and, despite what he says publicly about the value of the dollar, will do everything in his power to ensure the dollar heads lower for several years.

But Bernanke also has the wind in his sails with the dollar: Our biggest creditors, namely China, want the dollar replaced as a reserve currency. And it will likely happen a few years from now.

So my best recommendation here: I believe that as much as 80% of your money should be OUT OF THE DOLLAR … and instead, invested in currencies such as the Australian dollar, the New Zealand dollar, and even the Swiss franc which, despite all the hoopla about Switzerland losing its tax advantages and privacy laws, remains one of the strongest currencies in the world.

With speculative money, I’d look to play the dollar on the short side with an ETF such as the PowerShares DB US Dollar Bear (UDN).

Now, let’s move on to …

The Three Best Sectors For the Next Five Years

These are my three best sectors to invest in for the years ahead …

Best Sector #1: Gold

There’s no doubt in my mind: If you want to preserve the purchasing power of your dollars and make some healthy profits to boot, by far the best investment of all is pure, honest, real money that has stood the test of time for more than 6,000 years — gold.

Gold has always preserved its purchasing power. And today, more than ever before …

You need an asset that cannot be manipulated by the powers that be … that has no politician to answer to … no board of directors to dilute it by issuing stock and stock options … and no gimmicky accounting to establish its fair market value.

My core recommendation for the long haul: Physical gold and a gold ETF, like the SPDR Gold Trust (GLD).

Best Sector #2: Energy

Not just crude oil and gas, but also alternative energy.

Right now, the price of crude oil is hovering in the high $60, low $70 range. It will likely soon take another dip down to around $50.

But I believe the entire correction in the oil and energy market is over, and five years from now we’ll be looking at substantially higher prices for oil and gas.

The dollar’s decline will be a major reason why. So will growth in Asia, which continues to steam ahead. Especially China (be sure to see the July issue of Real Wealth Report featuring China, which publishes on July 17).

Oil and gas companies will once again become awesome long-term investments. Ditto for alternative energy plays in solar, ocean motion, nuclear energy, and wind.

My suggestion here: A good energy ETF for the long haul, like the Energy Select SPDR (XLE).

Best Sector #3: Natural Resources

In this category I group all other natural resources including agricultural commodities; soft commodities such as coffee, cocoa and sugar; base metals such as aluminum, copper, nickel and zinc, fertilizers; and last, but not least, water.

All are assets where supplies are limited and where demand (largely due to Asia’s growth) continues to grow at a rapid pace.

And all are tangible assets with intrinsic value, where real wealth is accumulated on a long-term basis.

Plus, they all stand to benefit as the dollar heads lower in its long-term bear market.

My core recommendation here: I like the ELEMENTS Rogers Intl Commodity ETN (RJI), an Exchange Traded Note that is similar to an ETF.

Well-rounded with investments in metals, agriculture, and energy, this ETN seeks to track the Rogers International Commodity Index and is a great way to invest in natural resources for the longer-term.

In addition, I recommend select plays in country-based ETFs … in select natural resource stocks around the world … and especially in countries like India, China, Indonesia, Thailand, and Malaysia.

Best wishes,

Larry

P.S. I cannot emphasize enough the importance of joining my Real Wealth Report so you can get the inside scoop … the real forces and factors impacting markets all over the world.

Real Wealth Report is my passion. Each and every issue is filled with detailed, unconventional research and commentary … along with recommendations to profit. All for just $99 a year!

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

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