Michael Shulman, January 8, 2010
Despite what Wall Street wants to believe, the economy and the markets are not even close to being out of the woods yet. In fact, the odds strongly favor a double-dip recession. Now, I know that's not what anyone wants to hear, but wishing and hoping won't get us out of this mess -- or make you any money.
There are a number of sectors that are getting talked up right now that are downright dangerous for investors to have their money in. And while the party may last a little longer, if you're long any of these sectors in 2010, there's a good chance you're going to regret it.
What should you do? Well, you have two options. You can avoid these sectors, which is smart, or if you have a penchant for making money, you can profit from them. How? I'll give you the best ETF to trade in each sector.
#1 Emerging/Developing Markets
In the past, Wall Street has lumped China in with Brazil, Russia and India calling them the BRIC countries. But this is no longer a viable way to look at these markets -- they all stand alone.
Simplistic momentum investing has taken hold in emerging market ETFs that cover regions such as Latin America or countries like Poland. Yes, Poland has its own ETF, the Market Vectors Poland (PLND). But there is too much money riding too much momentum in markets that are too small with too few equities and too little profit opportunities compared to the downside risk.
Even though the hottest money is still pouring into some truly exotic markets, Eastern Europe is a sucker's play in 2010. Your broker may call to tell you about ancient cultures, robust cities, etc., but the banking and financial systems of many Eastern European countries are in terrible shape and, more than likely, this will drag their economies down in 2010.
Trade: Buy put options on the SPDR S&P Emerging Europe (GUR).
#2 The Homebuilders
Many analysts say housing has bottomed and are touting the homebuilders in 2010. However, roughly 50%-60% of demand for homes is gone, more than 800,000 foreclosed homes have yet to hit the market with another 1.4 million or more on the way, and no one can get a jumbo mortgage.
Here's what I see happening: The homebuyer tax credit will be allowed to expire in April, there will be no more cash rebates to the homebuilders, and unemployment will continue to stifle demand.
#3 The Financials
The big banks are broke. The technical term is insolvent because they have cash and are paying bills, but their liabilities far outweigh their assets. These assets are being written down slowly -- and that includes many homeowners with prime mortgages now in trouble because of unemployment.
While this problem is common to the larger banks, the smaller banks are also being hit with souring commercial real estate loans. And there will no more bailouts for the bonus crybabies.
Trade: Buy puts on the double-inverse Financial Select Sector SPDR (XLF).
I admit, I'm a China bear, and not the panda kind. I lived in Japan at the peak of its bubble, and it all feels the same to me. Where others see growth, I see fraudulent data -- it is not anywhere near the 10% the Chinese government boasts, according to the International Energy Agency.
Chinese state banks are fueling an unsustainable boom similar to Japan in the 1980s, with money going into unneeded factories, as well as equity markets. And it's going to burst, probably in 2010, and, if not, then definitely in 2011. If you invest in Chinese ETFs to take advantage of the bubble, use tight sell stops. But if you want to be prepared for the great China crash, your best bet is to short the ETF that best mirrors the domestic Chinese economy and equity markets …
Trade: Buy puts on the PowerShares Golden Dragon Halter USX China Portfolio ETF (PGJ).
American consumers have lost one-third their wealth, and almost 1-in-5 is out of work, discouraged from looking for a job or working part time. Consumer credit lines are shrinking, and the Great American Piggy Bank -- the home equity line -- disappeared in the Lehman bankruptcy. Not a great scenario for consumer spending on anything other than necessary items.
So stay away from the famous brands with broken businesses and companies selling what I call adult toys (be good, this is a family publication) such as boats, motorcycles, jewels, $60 steaks and luxury travel.
Trade: But puts on the SPDR S&P Retail (XRT).