Mega Investment Themes You Shouldn’t Ignore
By Ron DeLegge, Editor
May 25, 2009
SAN DIEGO (ETFguide.com) – With 2009 just about half over, mega-investment themes are already beginning to manifest themselves. Some of these themes will happen sooner while others will take longer. Other themes may not happen exactly as we think or expect. There are many possible outcomes. Is your portfolio ready?
In the May issue of our ETF Profit Strategy Newsletter, we evaluated five mega-investment themes that all investors would be wise to pay attention to. Let’s analyze some of these emerging themes.
Spectacular Corporate Failures
Over the past year or so we’ve witnessed some of the most spectacular bankruptcies in history. Circuit City, Lehman Brothers and the Tribune Company are recent casualties. Certain bankruptcies have a high level of importance or significance to rest of the market while others don’t. Some bankruptcies create a large ripple effect than can be felt throughout a certain industry sector or even worse, the broader economy.
For example, the General Growth Properties bankruptcy has huge implications for the commercial real estate market. As the second largest U.S. mall operator, the collapse of General Growth has far reaching consequences for the value of mall properties and rents. It also has huge implications for the banks and lending institutions that gave General Growth all of its money. J. Paul Getty said it best: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million that’s the bank’s problem.”
Financial stocks within the SPDR KBW Bank ETF (NYSEArca: KBE), the Select Sector Financial SPDR (NYSEArca: XLF) and the SPDR KBW Insurance ETF (NYSEArca: KIE) have recouped some of their market losses but still face huge obstacles.
Investors in individual stocks continue to be the most severely impacted by the threat of more corporate failures. In contrast, investors that prudently diversify are more insulated from the financial damage caused by corporate failures. How are you doing in this regard?
Reduced Consumer Spending
Some mega investment themes are subtle, whereas others are less so. A drastic scale back in spending by U.S. consumers is an ongoing theme that’s ready visible. Companies like Circuit City along with Linen ‘n Things have been forced out of business and others will follow.
For certain retailers, lower consumer spending couldn’t come at a worse time. Despite is 46-year head start on Wal-Mart Stores (NYSE: WMT), the Sears Holdings Corporation (NasdaqGS: SHLD) continues to suffer shrinking market share. Is this a one-time occurrence or a trend that will eventually reverse itself? Today, Wal-Mart’s market capitalization or size is 28 times larger than Sears! The franchise value of the Sears brand has been greatly undermined by Wal-Mart along with other competitors like Kohl’s (NYSE: KSS) and Target (NYSE: TGT).
The severity of the economic recession was felt by U.S. retailers (NYSEArca: XRT) during the 2008 holiday season. Even though retailers were installing signs saying “50% and 75% discount,” consumers were unmotivated to spend. Certain industry sectors like utilities (NYSEArca: XLU) are more immune to lower consumer spending compared to Consumer Discretionary (NYSEArca: XLY).
Fiscal Instability of U.S. Government
Standard & Poor’s cut its outlook on the United Kingdom’s triple-A credit rating to “negative” from “stable.” According to S&P, the U.K. faces a 33% chance of a rating cut in the future. The Kingdom’s national debt load is almost at 100% of its gross domestic product (GDP)!
No doubt, news about the U.K.’s problematic debt load prompted U.S. Treasury Secretary Timothy Geithner to say the U.S. will not lose its pristine triple-A credit rating. Unfortunately, a growing chorus disagrees with Mr. Geithner’s assessment, including us.
Last week Bill Gross co-chief investment officer at Pimco told Bloomberg he believes the U.S. will eventually lose its coveted triple-A credit rating. The U.S. is running a $12-to-$13 trillion deficit with another $70 trillion of unfunded liabilities. Government spending under the Obama administration has accelerated, leading the nation’s debt load to grow. According to Bloomberg data, U.S marketable debt now represents around 45% of GDP.
The mega-investment themes mentioned above were among the five themes listed in the May issue of our ETF Profit Strategy Newsletter. We thoroughly explained what’s occurring and the best ETFs to capitalize on the theme. In our view, each of these mega-themes warrants the attention of all serious investors. Don’t go to sleep at the wheel! Check it out.