Market leaders of the year seldom come back for a repeat
performance year after year. And losers eventually turn around
due to the "regression to the mean" theory in which extreme moves
up or down even out over the long run.
Here is an overview of five
in alphabetical order that our panel of investment strategists is
making contrarian bets on. They explain why each of these is due
to rebound in the New Year.
IQ Global Resources ETF (
) 2012 return: 7.89% vs. 16.9% for the MSCI World Index.
Adam Patti, CEO of IndexIQ: Recent predictions from
commodities analysts with Goldman Sachs and elsewhere of a
pending "commodity renaissance" are just one reason we strongly
recommend investors consider GRES, the first global resources
Goldman and others have pointed to a number of factors that
would seem to indicate a new commodities "renaissance" in 2013,
spurred by improvements in the global economy and increasing
demand for natural resources around the world. Complicating
matters though is the fact that not all commodities will see
their prices lifted by these factors. Some, such as gold, may in
fact be headed for a decline. The key for investors looking to
add commodities to a portfolio will be to start with the broadest
possible basket of equities. That is what GRES delivers, along
with an equity hedge designed to dampen volatility.
GRES is the broadest commodities and natural resources ETF in
the market, and the only ETF to include exposure to all of the
following commodity sub-sectors: livestock, precious metals,
grains, food and fiber, energy, industrial metals, timber, water
GRES is designed to reweight its allocations to individual
commodity sectors monthly. The fund is diversified both by sector
and geographically (the U.S. is currently the country with the
largest weighting, but equities from the U.K., Japan, Australia,
Canada and more provide an added layer of diversification).
J.P. Morgan Alerian MLP Index ETN (
2012 return: 4.84%
John Graves, editor of "The Retirement Journal" in Ventura,
Calif.: Master Limited Partnership ETFs represent the independent
oil and gas producers, distributors, pipelines, storage
facilities and transshipment companies in America. They are not
the majors, nor are they global. The niche of U.S. energy
production and distribution is their playground.
The oil and gas market is in revolutionary turmoil that goes
far beyond price-to-earnings, price-to-book, or other market
valuation metrics. The change is systemic. Supply of the raw
material for power generation, agricultural, metal working and
plastics feedstock -- natural gas -- has become a tidal wave. It
is overwhelming the market's ability to price effectively. The
same can be said for crude oil production and its fuel extracts:
gasoline, diesel and aviation.Delta (
) has just bought a fuel refinery in the Midwest to ensure fuel
supply, as example.
The third leg of the supply triad, NGLs (natural gas liquids
such as propane, butane and ethane), are in such oversupply today
that U.S. exports of these gases have reached all-time highs.
Venezuela imports more fuel and NGLs than it produces.
Some 1.7 million new jobs, $65 billion in federal and state
tax revenues, a 41% decline in crude imports and a massive 450
million tons reduction in greenhouse gas emissions are important
points of awareness in this industry. These macros will drive
further price increases over time.
The primary driver of MLP ETFs is demand for natural gas,
fuels and NGLs, which grow with the U.S. economy. Further export
potential awaits federal approvals. The secondary driver is
global demand. Natural gas is far cheaper here than in Europe or
Asia. This pricing differential will be taken advantage of by
capital players. Crude oil cannot be exported from the U.S.,
The risk in this world is oversupply, federal intervention
(via the Environmental Protection Agency) and U.S. or global
recession. The play is less an energy play than a demand play.
Remember this distinction.
Market Vectors Agribusiness ETF (
2012 return: 12.4%
Andre Weisbrod and Keith Moorhouse of STAAR Financial Advisors
in Pittsburgh, Pa.: We like MOO for the long haul, regardless of
short-term performance. Global demand for food is strong and will
increase as long as global populations continue to grow. In 2006,
there were 6.7 billion people in the world. By 2050 there will be
9.2 billion. That's 230,000 new people per day. Food demand is
expected to double by 2050 according to the Food and Agriculture
Organizations of the United Nations, FAO. By 2030 the world will
need at least 50% more food, according to United Nations'
Government policies in India have not favored potash
applications; rather they have favored nitrogen. India has gone
from shipments of about 6.5 million tons to down around 3 million
tons. World demand is currently 53 million tons.
India estimates using a nitrogen-to-potash ratio of 10-to-1.
That's ten parts nitrogen for one part potash. The optimal ratio
for yield is 3-to-1. When India was buying 6.5 million tons, they
were at a ratio in the area of 6-to-1. Assuming India returns to
needed levels, world demand would rise to between 56 million and
60 million tons.
We believe the demand for potash will rise in the emerging
markets, particularly India and China. India has a big
malnutrition problem. In anticipation,Potash Corp. of
) expects 13 million tons of potash capacity to be added
world-wide over the next five years and of that it will produce
5.3 million tons.
Food demand is expected to rise in 2013. Current inventories
of fertilizers will be drawn down. This fourth quarter will see
more inventory reductions. We expect seed corn prices to trend
upward as a result of the historic drought this season in the
U.S. Prices could rise 8%. But overall input costs for U.S.
farmers are expected to remain relatively flat.
Due to the drought the U.S. corn yield for 2012 is expected to
be down over 11%. Corn prices are above their historic trend-line
rate of $2.00-$2.50 per bushel and corn prices peaked this past
summer. Ethanol demand has been down. And in the current
political environment, it is too hard to predict what future
ethanol production requirements will come out of Washington.
From a valuation standpoint, MOO is very close to the S&P
500. The S&P 500 has a price-to-earnings ratio of 13. Average
P/E for MOO's holdings is 13.51. Potash Corp. of Saskatchewan,The
Mosaic Company (MOS), andAgrium (AGU) make up over 20% of assets.
We estimate earnings-per-share growth for the top ten holdings in
MOO to outpace the market. Current consensus is for earnings
growth of 11% for the broad market. We believe that is too high.
We think 8-9% growth is more reasonable and put the average
growth rate for the top ten holdings of MOO to be 18%-20%.
Overall, conditions should become more positive for the
companies that make up MOO. If global growth can be sustained
even at slower rates, there is a reasonable rationale for MOO to
outperform the S&P 500 in the next few years.
The top-10 holdings, which make up 59.61% of the funds assets,
are biased to grain related agribusinesses. Grain prices can
swing significantly. Hence the added volatility and the need to
balance out the agribusiness allocation with other funds such as
IQGlobal Agribusiness Small Cap ETF (CROP).
Market Vectors Semiconductor ETF (SMH)
2012 return: 9.4% vs. 17.4% for the S&P 500
Andrew Hill, president of Andrew Hill Investment Advisors
Naples, Fla. with $35 million in assets under management:
Approximately, 30% of SMH is held inIntel (INTC) andTaiwan
Semiconductor (TSM), thus the performance of these two holdings
will largely influence the performance of SMH. While TSM has had
a good 2012, INTC has not. INTC has been hurt by a downturn in
the personal computer (PC) market and the lack of success in
capturing a material presence in the mobile computing market.
Summing up all the negatives, analysts have slashed their
earnings estimates and investors have given up Intel for being
dead. Looking forward to 2013, we see and improving demand for
chips and improving interest in chip stocks. The emergence of the
Ultrabook and Windows 8 spells out the potential for a turnaround
in PC demand. The improved features of the Ultrabook including
slim design and fast processing speed, provide a reason to
upgrade outdated technology.
The demise of the PC is overstated. Upgrading laptops has been
on hold pending release of Windows 8, Ultrabooks and other new
machines. It may be three to six months before the corporate
world begins to upgrade equipment, so investors may change their
opinions from extremely negative views to a more neutral
Overall chip industry sales will maybe be up 4% to 6%.
Increases in sales can lead to a greater percentage increase in
profits. Intel's product conversion in 2013 will profit because
of investment in the new equipment but that should improve in
late 2013 and 2014.
United States Natural Gas Fund (UNG)
2012 return: -24.3% vs. +3.33% for Morningstar Commodities
Charles Freeman, portfolio manager at Holderness Investments
Company in Greensboro, N.C. with $96 million assets under
management: In 2012, the perfect storm of advances in drilling
technology and above average winter temperatures led to a
dramatic increase in natural gas supply.
Weather patterns this winter remain uncertain as some parts of
the country are projected to have above average temperatures and
some below. Volatility in the natural gas spot price reflects
Our positive outlook on natural gas, however, comes from two
main trends on the demand side that we see happening in the
future. First, as the price of natural gas has come down
dramatically given newfound supply, it has allowed a surge in
conversion for power generation. Natural gas is rapidly replacing
coal as the "go to" fuel for power generation.
This is a positive for natural gas since historically
consumption has been very seasonal with the most usage in the
winter months. On the other hand, electricity generation peaks in
the summer months; therefore, demand for natural gas will become
more consistent throughout the year as more plants switch from
Secondly, we feel the transportation industry is on the cusp
of changes as well by considering LNG (liquefied natural gas)
powered trucks for fleets across the country.Clean Energy Fuels
(CLNE) has just completed Phase 1 of its plan to install LNG
filling stations at truck stops along the major trucking routes
of the U.S. All of the major truck manufacturers have CNG
(compressed natural gas) and LNG truck options, which allow
companies to begin integration as they add new trucks to their
Companies, likeFedEx (FDX), are beginning to experiment with
LNG-only tractors. With Clean Energy andRoyal Dutch Shell (RDSA)
providing the initial LNG fueling infrastructure, we could be
near the beginning of a significant shift to natural gas for fuel
in the transportation industry. With such broad integration
possibilities of natural gas, we are investing in UNG; because it
has a high correlation to the spot price.
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