January 19, 2010
The second half of 2010
Leuthold’s enthusiasm wanes as he looks beyond the first six months of this year, primarily because he is wary of federal deficits. He does not expect Congress to act in a fiscally responsible manner. The pending November elections will result in ill-conceived spending measures designed to generate votes and not economic growth, he said.
“The deficit isn’t coming down,” he said, which points to a “pretty big market correction” sometime in the second half of the year.” That “could be a decline of 15-20% from the peak,” he said.
In his asset allocation fund, Leuthold has half of his equities in foreign companies, and about 60% of that half is in emerging markets. Over the last 15 years, the biggest change in his business is expanding his research into non-US markets.
Leuthold has been very successful with his investments in China, but he is trimming those back now and turning to other Asian countries, including Singapore, Thailand, Korea and Vietnam. He expects 5-7% appreciation in Asian currencies “unless there is a run on the dollar.”
Leuthold said the euro does not offer strength or stability against the dollar and is exposed to political risk, such as the recent unrest in Greece. He noted that no multi-country currency has ever survived. The diverging economies of the 16 countries that use the euro and societal problems, he said, will ultimately lead to the demise of the euro over the next five to six years. “The seeds of the destruction have been planted,” he said.
Leuthold was short the euro against the dollar until about 10 days before he spoke, and he said he would short it again if its price rose to 1.48 or 1.49.
“A major run on the dollar could bring some sanity to our politicians in Washington,” he said. He defenses against this are gold and his foreign equity exposure.
“I can’t find anything I like in the bond markets,” Leuthold said. Normally, his asset allocation fund has at least 30% in bonds, but now, according to his latest newsletter, he holds only 11% in fixed income. “Yields are going to rise due to inflation or fears about our currency,” he said. He is short long-term Treasury bonds, and recommended this position either through direct shorts or ETFs. His only significant long fixed income position is some Brazilian bonds yielding 10.5%.
“Municipals are different, though,” he said, because he is confident taxes will go up, and their taxable-equivalent yields will be attractive to investors.
He has added high-yield stocks to his portfolio to substitute for his fixed income allocation, including positions in Altria and Reynolds, which offer 6-7% yields with “less risk than the bond market offers,” he said.
Among commodities, Leuthold does not like industrial metals, because recent price increases in this sector have led to the development of new extraction and production capabilities that will lower prices.
“I think gold is going higher,” Leuthold said, and he believes it is undervalued relative to its inflation-adjusted 1980 price of $2,250. He expects gold to trade between $985 and $1,600 in 2010, and “it could go higher than that.” Problems with the federal deficit will be the driver of higher gold prices.
Leuthold has been a remarkably accurate forecaster, and his research is widely read by institutional investors. One area, though, to which his accuracy does not extend is picking a Super Bowl winner. His have been correct a mere 11% of the time.
Vikings fans take note – this year he called for a Minnesota-San Diego Super Bowl and a Viking victory. The Chargers have already lost since.
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