Aug. 4, 2011 -- The same crisis that gave grey hair to Congressmen is creating new profit opportunities for investors, say financial strategists.
Thanks to continuing U.S. debt woes, now may be the best time to get a fixed-rate, 30-year mortgage; or the best time to invest in the stocks of U.S. companies that export. It's a good time to bet against U.S. treasuries and to put money into currencies that are likely to outperform the dollar.
On Wednesday, the dollar fell on worries that credit rating agencies may yet downgrade U.S. debt, despite the debt-reduction bill passed by Congress and agreed to by the White House earlier this week. Two reports issued Wednesday—one on U.S. factory orders, the other on the U.S. service sector—gave more bad news, suggesting that already-anemic U.S. economic growth is slowing. The dollar closed the day down against the yen, the British pound, the euro and other currencies.
Yet this bleak economic news is creating investment opportunities in several categories:
Home Mortgages. The fact that the yield on 10-year U.S. treasury notes has plunged is good news for anyone looking for an affordable a home loan, since mortgage rates and 10-year treasuries typically move in tandem. Jeff Lazerson, a mortgage broker in Laguna Niguel, California, told the L.A. Times on Tuesday that it was the first time in his 24 years' experience as a broker that he has seen fixed-rate 30-year loans priced under 4 percent. Admittedly, only the very best-qualified borrowers can get that rate, but for them it's a golden opportunity to buy or to re-finance.
U.S. Treasuries. Worried that treasuries will decline further? You can invest in a mutual fund that goes up when treasuries go down. These allow investors, in effect, to bet against U.S. debt. Examples include the ProShares Trust Ultrashort 20+ Year Treasury ETF and the Rydex Inverse Government Long Bond Fund. Tom Lydon, editor and publisher of ETF Trends, tells ABC News, "Investors are shocked with the recent free-fall in treasury yields." Investors who buy into investments like those above are betting that "the Fed's loose monetary policy will eventually lead to high inflation and a weaker U.S. dollar."
Foreign Currencies. If the U.S. dollar continues to decline, Lydon suggests investors consider a fund pessimistic about U.S. currency. Example: The PowerShares DB US Dollar Bearish Fund, which rewards investors when the dollar weakens in relation to the Japanese yen, the British pound, the Canadian dollar, Swiss franc and Swedish krona. Alternatively, investors can simply buy those currencies directly.
Axel Merk, manager of the Merk Funds, which include the Merk Hard Currency Fund, thinks it makes more sense for an investor to buy a basket of currencies rather than the currency of any one country (Singapore, for example, whose strong economy and positive trade balance have made its dollar a star performer).
"Having a basket," he says, "mitigates the risk. We like the countries whose central banks are printing less money than the U.S. and whose governments are spending less." Merk's basket includes some of the currencies named above, plus the New Zealand dollar and the Australian dollar, as well as gold.
Stocks of U.S. Exporters. China may be eating, figuratively speaking, the U.S.'s lunch; but that's good news for U.S. companies who are feeding it--ones selling the goods and services a growing China needs and wants. Kevin Cook, senior stock strategist at Zacks Investment Research, says the list of publicly traded U.S. companies that stand to profit from increased exports includes Caterpillar, Deere, Cummins and other makers of construction equipment and heavy machinery. He also likes Eaton, which makes hydraulic systems and electrical components for power grids.
"China has people who want the lifestyle of the West," he says. "They're building roads and schools and hospitals. They're expanding agriculture."
One might also buy the stocks of U.S. companies that have established operations in China and are selling to it locally. A recent article in the Harvard Business Review by members of the Boston Consulting Group argues that such companies--including General Electric and General Motors--stand to profit better than will U.S. exporters.
Stocks of Chinese Companies. If the U.S. economy is sputtering, China's, at least for now, continues to race along. Why not buy in? The easiest way is to buy Chinese companies whose stocks are traded right here in the U.S., on NASDAQ and other U.S. exchanges. True, these represent only a small fraction of the companies traded on the Shanghai and Hong Kong exchanges (about 180 companies are traded in the U.S., versus 5,000 in Shanghai).
But, says Blaze Fabry, founder of Chinavestor, these represent some of China's best opportunities. He likes in particular stocks pegged to consumer demand, such as telecom provider China Mobile, local airlines including China Eastern Air and China South Air, and search engine giant Baidu, the so-called Google of China.
Berkshire Hathaway?! - "I would buy the hell out of Berkshire Hathaway," says Ali Wambold, former CEO of Lazard Alternative Investments and now a managing principal of Corporate Partners, a private equity fund. "The logic is simple."
He proceeds to tick off all the other options an investor, worried about U.S. debt, might consider--including some of the ones discussed above.
"It's a process of elimination," Wambold explains. "The question that you start with is: How am I going to get killed?" To avoid getting killed, he would not own long-term U.S. government bonds. He would not own gold. Gold certainly has done well and has outperformed many other investments and "will do better than the U.S. dollar, over the long term," he says, but is not fated to enjoy, he thinks, "an explosive increase in value" from its present price.
How about commodities? "It all depends on how nimble you are. If it were you or me, I wouldn't touch them. Too much volatility. There's no way to know the truth about what the Chinese are doing in that market."
How about emerging market equities--say stocks of Chinese companies? "It's very difficult to play China as an investor because the Chinese are so manipulative and dishonest. You never know if you're getting the straight story on anything. They have a legal system not protective of the foreign investor, let alone the domestic."
Currencies? "I would certainly diversify out of the dollar wherever I could. Debasing the U.S. currency is the only macro economic tool we have left, and Ben Bernanke has shown he has every inclination to use it. I would tiptoe away from the U.S. dollar."
Okay, what else?
"What's left are U.S. equities. A radical idea!" The grueling debt ceiling crisis, just passed, was in his view "not a fiasco at all" but "a very good sign" that the U.S. has at last begun to summon the national will necessary to deal with its problems. "I think American business is going to be okay, and that U.S. equities are the place to be."
Why Berkshire Hathaway in particular? "It has qualities impossible to duplicate. It's run by one of the most experienced and smartest investors in the world. It's a barometer of the U.S. economy. And it's the perfect leveraged play on that economy--leveraged because of Berkshire's insurance holdings."
Plus, if you bought it now you'd be getting it at a reasonable price--an "historical buying opportunity" he calls it--made possible by the negative press temporarily surrounding the ouster of Warren Buffett's would-be successor, David Sokol.
Fair warning: Buffett, who is 80 years old, can't live forever.