10 money-making investment ideas for 2012

Where to put your money in yet another challenging year 

Jan. 6, 2012, 12:01 a.m. EST

By Jonathan Burton

Article from MarketWatch

SAN FRANCISCO (MarketWatch) — Many stock investors thought 2011 would be upbeat, but they got beat up instead. The year for stocks was a year of shocks, while bonds remained unbroken.

Understandably, people are more wary than usual about where to invest this year. As you review your portfolio, think about how 2012 might be different from 2011 and ways it could bring more of the same. It pays to keep in mind one of esteemed former Wall Street analyst Bob Farrell’s cardinal rules of investing: “When all the experts and forecasts agree — something else is going to happen.” Read more: 10 investing rules tailor-made for tough markets.

Before delving into what 2012 could deliver, let’s recap how MarketWatch’s 10 investment ideas for 2011 did. Not bad, in fact, especially considering the almost daily assaults on the markets. Read more: The 10 investment ideas we thought would make you money in 2011.

Most of the picks MarketWatch made in December 2010, based on recommendations and research from investment professionals, beat the Standard & Poor’s 500 Index SPX +0.29%  — though that’s not saying much about a year when the U.S. benchmark was flat on a price basis and up 2.1% with dividends reinvested.

The best advice was to run with the “Dogs of the Dow.” This strategy of buying the 10 highest-yielding stocks in the Dow Jones Industrial Average DJIA -0.02%   and holding for 12 months rewarded investors with stellar gains, up 17% for the year including reinvested dividends.

Adding consumer-staples stocks to consumer-discretionary stocks was another winner, with the staples sector gaining 10.5% and discretionary shares up 4.4%. Energy and technology sectors also outperformed the market, as did growth stocks.

The biggest losers: Materials-sector stocks, down almost 12%. Emerging-markets infrastructure plays and industrial-sector stocks also lost ground.

Nowadays investors’ mood is mixed at best. Mutual-fund shareholders have piled into bonds and fled U.S. stocks for several years; surveys of investment advisers show cautiousness about buying stocks, and hedge-fund managers appear increasingly bullish. Bond investors, meanwhile, have to question when this epic bull market will end.

Looking ahead, investors should tune out the noise, turn on the head lamps, and consider these 10 ways to position your portfolio in 2012:

1. Stick with 2011’s winners

Buy what’s worked and head for the beach? Not quite. But many of the headwinds investors fought in 2011 haven’t disappeared and could worsen, which means that some of last year’s winners could repeat.

Geopolitical and economic risks will, as always, impact financial markets and consumer prices short-term, with accompanying high volatility. Yet broadly speaking, in the current anemic global climate, where economic growth is increasingly scarce, pressure on interest rates and inflation isn’t much of an immediate threat.

U.S. stocks trounced their international counterparts, and look to do so again in 2012. Large-caps outperformed small- and midcaps, and growth-stock investors bested more bargain-minded value buyers. Expect more of that as well.

The hunt for yield is another priority. The Dogs of the Dow perform in volatile, tug-of-war markets and seem poised for another round. The 2012 Dogs are unchanged from 2011 except Procter & Gamble Co. PG -0.42%   has replaced McDonald’s Corp. MCD -0.01%  . AT&T Inc. T -0.10%   is again the highest-yielding Dow component.

In a slow-growth world where developed nations are deleveraging — much of Europe is likely to be mired in recession this year and the U.S. will be lucky if growth nears 2% — expect bond yields to remain low.

The riskiest play is long-term Treasurys. If the 30-year Treasury yield slides to 2% or 2.5% — perhaps in a euro-sparked panic — that probably would be the last gasp of the Treasury bond bull. Still, investors would win big on a total return basis, though not as much as in 2011.

As an alternative to volatile long- and intermediate-term Treasurys, consider high-quality corporate bonds, municipal bonds and income-producing stocks.

2. Own defensive stocks in a deleveraging age

Focus on capital preservation and the preservation of cash flow.

From a stock perspective, the classic defensive sectors include yield-rich consumer staples, health care and utilities.

Among these three, only the consumer-staples sector gets an enthusiastic nod from analysts at S&P Capital IQ. Utilities, especially shares of electric companies, enjoyed a tremendous run in 2011, up 14.5%. And while these companies offer hefty dividends, valuations have increased considerably and the S&P analysts expect market performance from the group in 2012. The analysts are also neutral about the health-care sector, which gained 10.2% last year.

3. Add some economic sensitivity

“A balanced sector approach that emphasizes both cyclical and defensive themes is critical to navigating this manic market,” said Alec Young, global equity strategist at S&P Capital IQ, in a recent research report.

That means you have to temper the urge for flight and beef up the portfolio with some fight. Put some money into cyclical sectors that lagged in 2011, including materials, industrials, energy and technology.

“Some of the beaten-down cyclical groups will come back,” said Doug Ramsey, chief investment officer at mutual fund firm Leuthold Group. Topping his list: shares of railroads, chemicals, industrials and materials.

4. Stick with dividend-paying growth stocks

U.S. corporate balance sheets — the fundamentals — are in excellent shape overall. Still, in a slow-growth climate the advantage goes to the best of the best. These companies tend to be found in areas that are less economically sensitive. They’re typically large-caps, with a “wide moat” of business, strong cash flow and a history of using capital for productive purposes including acquisitions, share buybacks and regularly higher dividend payments.

“Gravitate more to the income-oriented sectors of the U.S. market for the time being,” said David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates, in a recent research report.

As examples of high-quality companies whose dividend yields top Treasurys, he points to AT&T, 3M Co. MMM -0.45%  , Exxon Mobil Corp. XOM -0.18%  , Emerson Electric Co. EMR -0.42%  , McDonald’s, Johnson & Johnson JNJ -0.12%   , Colgate-Palmolive Co. CL -0.51%    and Wal-Mart Stores Inc. WMT -0.49%   

Other defensive, cash-rich growth stocks on Rosenberg’s suggested list include Procter & Gamble and Microsoft Corp. MSFT -0.04%.

   To be sure, this is an increasingly crowded trade. Many of these companies were “discovered” over the past year, as investors rotated to large-cap, higher-yielding payers. That’s one reason why last year’s best U.S. market sectors were utilities and consumer staples. McDonald’s, for instance, soared 35% in 2011.

So stay the course for now, but remember Bob Farrell’s rule and watch for weakness in this group heading into 2013, when smaller-cap stocks could begin to improve.

5. Consider small-cap stocks

Small-caps were market leaders for years, but despite a strong fourth-quarter 2011 showing the group has lost that poll position.

The Russell 2000 Index RUT +0.67%   fell 4.2% in 2011, while the large-cap Russell 1000 Index RUI +0.36%  gained 1.5%.

But that dismal 2011 result might be a silver lining for small-caps.

“The best secular investment theme in the global equity markets is U.S. small-caps,” Richard Bernstein, CEO of investment firm Richard Bernstein Advisors, wrote in a December report to clients.

“Companies in the Russell 2000 have been producing positive earnings surprises at a better rate than most other regions of the world,” he added. “Although smaller U.S. companies’ earnings fundamentals are not yet superior to their larger U.S. counterparts...that relationship is likely to reverse.”

Moreover, small-caps’ general lack of international exposure could be a plus if, as expected, the U.S. dollar strengthens, according to Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch. A stronger dollar is a negative for larger companies with sizeable overseas operations. DeSanctis favors the larger and higher-quality small-cap names, which he noted could benefit from increasing merger and acquisition activity.

Yet with so much uncertainty looming over global markets and the prospect of continued volatility, putting money into small caps would require a big leap of faith for an investor in 2012. That said, look for attractive entry points to this unloved group.

6. Consider high-quality European stocks

Recession in the euro zone is not only expected, but may already have arrived. Shares of European stocks have been shorn — the average European stock mutual fund lost 15% in 2011. As always after a big selloff, there’s a case to be made that the worst is priced into these markets — although another leg down can’t be ruled out.

At the risk of trying to catch a falling knife, Michael Harnett, chief global equity strategist at Bank of America Merrill Lynch, told investors in a December research report to buy the “best and the distressed” in Europe.

“European stocks are the most oversold they have been relative to U.S. equities in 20 years,” he said. “Go shopping for high quality European equities with strong earnings, healthy balance sheets and solid margins.”

Merrill’s recommended large-cap European stocks to weather recession include AstraZeneca Plc AZN -0.40%   , Telefonica S.A. TEF -0.18%  , Total S.A. TOT -0.14%  and BP Plc BP +0.05%  .

7. The U.S. dollar is the one-eyed king

“Muddling through” the recessionary morass is the most likely scenario analysts at Brown Brothers Harriman & Co. see for Europe.

“One of the results will be a weaker euro EURUSD +0.06%   ,” the BBH analysts noted in a recent report. “But barring an outright collapse, depreciation is likely to be broadly welcomed by European officials and businesses. A weaker euro is also consistent with the easing of monetary policy.”

The U.S. dollar will be the beneficiary of a weaker euro. The U.S. Dollar Index DXY -0.07%  gathered steam heading into 2012 ; a proxy for the dollar, PowerShares DB US Dollar Index Bullish Fund UUP +0.04%  , gained almost 6% in the last half of 2011. BBH analysts expect the euro to bottom at 1.20 in the second quarter of 2012 and end the year at 1.27 — about where it recently traded. 

Said A. Gary Shilling, president of investment advisory firm A. Gary Shilling & Co., Inc. “The dollar should continue to appreciate, especially against the euro but also against commodity currencies” such as the Australian dollar AUDUSD -0.13%   , Canadian dollar USDCAD -0.11%   and Mexican peso. USDMXN -0.08%   

“The dollar in the long run is likely to remain the world’s primary international trading and reserve currency,” Shilling noted. “There are,” he added, “no substitutes for the buck in the foreseeable future.” Read more: Look for 2012 to be the year of the dollar.

Of course, a stronger dollar means U.S.-based multinationals will lose a tailwind they’ve ridden for several years. Sales earned abroad are worth more when repatriated in weaker dollars, and no sector is more heavily exposed to developed and emerging markets than technology.

8. Stick with gold

Bank of America Merrill Lynch strategist Harnett expects the Federal Reserve, the European Central Bank and others to pump more money into a debt-laden global financial system, and that development would favor gold GC2G +0.18%.

“Gold remains one of the best ways to play this attempt by global policymakers to mitigate the negative impact of debt deleveraging,” he noted in a research report.

Rosenberg, the Gluskin Sheff economist, agreed: “So long as policymakers ensure that real short-term rates are negative — this is a very key indicator for gold — one should expect to see the secular price trend remain tilted to the upside,” he said.

Analysts at S&P are also positive about the yellow metal. The firm sees gold trading in a sideways pattern for much of the year before breaking out to the upside. Gold will finish 2012 at around $1,900 an ounce, S&P said.

In addition to exchange-traded fund proxy SPDR Gold Trust GLD -0.18%   and iShares Gold Trust IAU -0.19%  , such a rebound would be favorable for gold miners, including S&P favorites Barrick Gold Corp. ABX -0.41%  , Newmont Mining Corp. NEM +0.34%   and Randgold Resources Ltd. GOLD +0.12%    

9. Vote for the presidential cycle

Observers of the U.S. stock market’s four-year “presidential cycle” know that 2011 didn’t live up to history. The third year of a president’s term has been the best, with the S&P 500 gaining 16% on average since 1945 without reinvested dividends, S&P data show. Last year the S&P 500 finished flat.

Election years usually aren’t as robust as the third, with the market up around 6% on average. Typically, the market’s best sectors include consumer staples, energy and Industrials, with technology, materials and utilities posting below-average results.

Importantly, the U.S. market has done well in election years when an incumbent president is running again, regardless of the outcome, according to the Stock Trader’s Almanac. In addition, subpar third years of the cycle since 1945 have not led to a weak election year.

10. Volatility reigns; emphasize safety and income

The high volatility that shook investors in 2011 isn’t likely to subside this year. The challenge is to stay in the ring without getting knocked out.

Gluskin Sheff’s Rosenberg is steering investors to “safety and income at a reasonable price” as the global economy moves through what he called “the mother of all deleveraging cycles.”

Accordingly, he said, focus on high-quality stocks and bonds, income-producing oil and gas partnerships and real-estate investment trusts, precious metals and companies that produce or supply goods and services that people not only want, but must have.

“For 2012, tactical strategies will also be crucial, at least as much as in the roller-coaster ride of 2011,” Rosenberg added. “Investors should be making a special effort to fight dogma and keep an open mind.” 

Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.

Article from MarketWatch

Bonds Prove Best Financial Asset for 1st Time Since at Least ‘97

December 31, 2011, 1:35 PM EST

Article from Businessweek

By Cordell Eddings

Dec. 31 (Bloomberg) -- For the first time since at least 1997, the bond market produced the highest returns of any financial asset, beating stocks, commodities and the dollar as Europe’s sovereign-debt crisis threatened the global economy.

Led by U.S. Treasuries, fixed-income securities worldwide returned 5.81 percent, including reinvested interest, this year through Dec. 29, Bank of America Merrill Lynch indexes show. The Dollar Index tracking the U.S. currency against six peers rose 1.6 percent, while the Standard & Poor’s GSCI Total Return Index of commodities fell 1.18 percent and the MSCI All Country World Index of shares tumbled 6.9 percent with dividends.

“The year was one of tremendous volatility, brought on by increasing global and political economic uncertainties, which drove investors massive flight to quality into bonds,” Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a telephone interview on Dec. 27. “There has been a general softening of expectations for growth and inflation worldwide, and bonds have thrived.”

The European Central Bank and the Reserve Bank of Australia led central banks that reduced interest rates as the International Monetary Fund cut its forecast for global economic growth to 4 percent for this year and next from prior estimates of 4.3 percent for 2011 and 4.5 percent for 2012.

‘Severe’ Repercussions

In downgrading its assessment of the global economy, the IMF predicted in September “severe” repercussions if Europe failed to contain a debt crisis that led to bailouts of Greece, Ireland and Portugal, and threatened to engulf Italy and Spain.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” Christine Lagarde, managing director of the IMF, said on Dec. 15.

Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,000 securities with a market value of almost $42 trillion, posted its best year since gaining 8.92 percent in 2002.

The biggest beneficiary from the flight to safety was U.S. Treasuries, which gained 9.64 percent, the most since 2008 at the height of the financial crisis. Treasuries due in 10 years or more soared 28.7 percent, the most since gaining 30.7 percent in 1995, even as S&P lowered the nation’s AAA credit rating one level to AA+ on Aug. 5 Moody’s Investors Service and Fitch Ratings affirmed their top ratings.

‘Biggest Surprise’

“At this time last year if you asked people what the best performing security class would be, not too many people would have said Treasuries, but it’s turned out to be the biggest surprise of the year,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said in a telephone interview on Dec. 27.

U.K. bonds were the best performers among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, jumping 17 percent. They beat German debt, considered the euro area’s safest securities, by more than 7 percentage points, the most since 1998.

Government bonds globally returned 6.03 percent on average, according to Bank of America Merrill Lynch indexes.

Dollar Strength

Investment-grade corporate securities gained 5.02 percent, while high-yield, high-risk, or junk, bonds returned 3.04 percent. Speculative-grade debt is rated below Baa3 by Moody’s and less than BBB- at S&P.

The rally in Treasuries bolstered the greenback, with U.S. Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, rising 1.6 percent. That followed a gain of 1.3 percent in 2010, marking the first time it advanced two years in a row since 2000-2001.

Among the 16 most-widely traded currencies, the yen was the only one to appreciate against the dollar, strengthening 5.4 percent. The biggest loser was South Africa’s rand, which depreciated 18.1 percent, data compiled by Bloomberg show.

The euro weakened 3.3 percent against the dollar, and fell below 100 yen for the first time since 2001. The 17-nation euro was the worst performer among the 10 developed-nation exchange rates tracked Bloomberg Correlation-Weighted Currency Indexes, losing 2.1 percent. The dollar advanced 1.1 percent on that basis and the yen gained 5.5 percent.

‘Big Question’

“The story of the year in currency markets has been the euro-zone crisis, and it has permeated every other capital market,” Boris Schlossberg, director of research at the online currency trader GFT Forex in New York, said in a telephone interview on Dec. 29. “Geopolitical risk will make a push for more volatility in the new year as whether the European Union as we know it will survive is still a big question.”

Commodities, as measured by the S&P GSCI Total Return Index, fell after gaining 9.02 in 2010 and 13.5 percent in 2009.

Copper slumped 21 percent this year, its first decline since 2008, as Europe’s debt crisis escalated and demand in China slowed. Cotton plunged 37 percent, its biggest loss since 2004.

“The market has come to the realization that there are, indeed, a lot of problems in Europe, and they are not going away, which could have knock-on effects for global growth,” Jeffrey Sherman, a commodities investor who helps manage $19 billion for DoubleLine Capital LP in Los Angeles, said in a telephone interview on Dec. 29.

Oil, Gold

Crude oil recorded its third straight gain, adding 8.2 percent to $98.89 a barrel in New York. Gold completed its 11th consecutive increase, the longest winning streak in at least nine decades. Bullion was at $1,564.20 an ounce in New York.

Two companies fell out of the list of the 10 biggest in the world by market value in 2011 from a year ago. Berkshire Hathaway Inc. dropped from 10 to 13 and China Mobile Ltd. slipped to 11 from nine. They were replaced by International Business Machines Corp., which jumped to six from 15, and Google Inc., which climbed to ninth from 13. Exxon Mobil Corp. remained the world’s biggest company while Apple Inc. jumped over Petrochina Co. into second.

The MSCI All Country World Index of stocks retreated after rallying 10.4 percent in 2010 and 31.5 percent in 2009. The MSCI index is valued at 12.4 times reported profit, 24 percent below the average from the past five years, according to data compiled by Bloomberg.

The S&P 500 was little changed and the Dow Jones Industrial Average climbed 5.5 percent. Both the S&P 500 and the Dow were among the 10 best performers of the 91 national indexes tracked by Bloomberg.

“Without a doubt, 2011 was the year of the coupon clipper as yield became an increasingly important source of return for both the bond and stock market,” said James Sarni, senior managing partner at Los Angeles-based Payden & Rygel, which manages $50 billion, in a telephone interview on Dec. 29.

--With assistance from Michael Weiss in Princeton, New Jersey. Editor: Paul Cox, Kenneth Pringle

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

Article from Businessweek

Bond funds, GILT funds best debt investment, says expert

Published on Tue, Dec 27, 2011 at 14:18
Article from CNBC-TV18
Updated at Wed, Dec 28, 2011 at 07:59

With all the noise around the government fiscal deficit target, borrowing programme and the general liquidity situation in the country, bond yields saw a sharp spike yesterday. Speaking to CNBC-TV18, executive director of Bank of Baroda, RK Bakshi says that with government borrowing increasing, bond yields will also have an upward bias. For the next quarter, the 10 year yield should average around 8.5%,” he said.

It is because of this that fund manager at Quantum Advisors, Arvind Chari asks investors to move out of fixed maturity plans to active funds. “Look at buying into income funds, bond funds or GILT funds which invest only in government securities,” he said.

Chari also asks fixed deposit investors to extend their maturities as the peak of the interest rate cycle comes close, because that will ensure higher returns and reduces the risk of reinvestment.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: This is a big jolt from 8.35% yesterday to 8.55% today. Where do you think bond yields will end the year itself?

Bakshi: The bond yields are susceptible to news flow quite naturally. Of course right from the beginning there have been doubts whether the fiscal targets will be maintained. We then saw the borrowing program increased to Rs 470,000 crore from Rs 417,000. So people are not sure whether it will stop at that or it will need more because alternate ways of funding the fiscal have not been able to fructify.

This Rs 15,000 crore announcement last Friday, although it is not clearly stated that it adds to the government’s total borrowing program, was not planned or calendared for this date. So this additional Rs 15,000 crore saw a big jump in yields from 8.34% like to 8.54-8.55% lines. There had been some worry there because they are all towards deficit or all to fund all companies, so that is keeping the market on tenterhooks.

Although the RBI has signaled lower rates, the government borrowing programs with the liquidity being what it is and OMO program being what it has been will definitely keep the market on up and down on news flow. Mainly it looks like if the borrowing goes onto increase, definitely there will be an upward bias.

Q: How much do you think banks like yours could be impacted due to rising NRE term deposits rates?

Bakshi: This is a big impact. It has come at a time when NRE flows had started improving because of the rupee rate becoming very attractive. Of course I cannot fault with the philosophical rationale of providing rates, but it has come at a time when the inflows have started increasing.

Q: So your margins will be hit?

Bakshi: Definitely, unless you are able to pass it on. But the credit sell is not definitely happening. We have just mentioned the quantum of increase. On a 3.5% deposit, if the increase is to 9%, then 5.5% is a major increase.

Q: Going into FY12 what's the kind of investment one should look into if you have to invest in debt?

Chari: We have been advocating investments to move from say money market funds or close ended fixed maturity plans (FMPs) into active funds. When I say active funds it would be investment into income funds, bond funds or GILT funds which invest only in government securities. We have been continuing to maintain that view because we all know we have a problem on the fiscal. Nobody believed that 4.6% number and the market still second guess as to how much will be the excess borrowing. It could be another Rs 40,000-60,000 crore of excess borrowing that the government can do, but it depends on how they are going to fund it. If the divestment route works out and SUUTI works out, then probably the demand for borrowing in the market will be lower.

Another thing that the government can do is to borrow through T-Bills. Given that we expect some reduction in CRR in either this policy or the next, that would mean that liquidity will not be as bad as it is currently. Government will spend, liquidity will come back to around Rs 1 lakh crore negative and RBI will continue to do open market operations to be able to keep the liquidity at +/-1. So a large part of increase in government borrowings can be through treasury bills and need not come to date at borrowings.

Q: Basically what does it mean for investors? Should they get into fixed income kind of funds, and within the fixed income category what are you advising? We are seeing a lot of mutual funds even offer FMP plans. What should an investor do for maximizing his returns on the fixed income front?

Chari: Let us take a normal investor who does not do mutual fund at all. So he is a fixed deposit investor, who is going to remain a fixed deposit investor. What we have been recommending them is to extend maturities at the peak of their rate cycle. So if you are doing 1 year FD or 1.5 year FD, extend it to 3-4 years. We have economic data points to point out that the economic down turn is there for sure, so RBI, if not now, will ease in the next 3-6 months. So rates are headed downwards despite the fiscal worries and worries on oil. So if you are a FD investor, extend your maturity so that you can lock in this 9.5-10% for a three year period and so your reinvestment in next year is that much lower.

If you are a mutual fund investor, depending on your risk appetite - long term government yields are volatile as you saw 9-8.24% and 8.25 8.5% in 3 weeks. So you will have to live with that volatility but the trend that we are seeing is downwards, yields are headed downwards despite the fiscal

Q: So which particular fund one should go through?

Chari: Depending on risk appetite, there are short term income funds which invest in 2-3 year maturities which are also available at 9-9.5% for an AAA PSU. So if you have less risk appetite but you still want to play, go into active funds because as bond yields come down, bond prices go up. So apart from the interest that you get, you also get capital gains.

Q: What is the name of the fund that people should look for?

Chari: It will be called short term income fund or short term debt fund. In the long term you will have long term income funds, which will invest both in government bonds as well as income funds. You will have to plan it based on your liquidity requirements. Even if you are doing fixed maturity plans, you should do it for a longer period, extend your maturity period.

Q: What are you expecting in the next quarter, the 10 year yield to average? Do you think it will go towards 9% or do you think it will remain between 8.25-8.5%?

Bakshi: On a balanced factor it should be around a median of 8.5%, it should not go towards 9%.

Article from CNBC-TV18