Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

Investor zeal for yield and disregard for risk favors the junkiest of the junk.

When the grand disconnect between investor focus on the immense liquidity created by central banks and weak and weakening global economies becomes unsustainable, probably after a significant shock, investors should shift from risk on to risk off.

Treasury bonds will benefit from:

  • slow economic growth at best,
  • Fed determination to reduce long-term interest rates.
  • looming deflation,
  • pension funds and life insurers who want to match long-term liabilities with assets of similar maturity,
  • being the haven from trouble in Europe and elsewhere,
  • China’s attempts to cool its economy and stoke weak exports that may cause a hard landing,
  • huge demand from the Fed and central banks and foreign governments.

Buy Treasuries not for their yield but for their appreciation:

  • The 30-yr Treasury bond yield will fall to 2 percent after the grand disconnect ends – a 30 percent total return in one year on a 30-yr coupon Treasury or 44.9 percent on a zero-coupon bond.
  • The 10-yr Treasury note yield will drop to 1 percent – a 10.4 percent  total return on the coupon bond or 11.2 percent on a 10-yr zero-coupon note.

Municipal bonds may benefit from the further decline in Treasury yields, while investment-grade corporates remain attractive for yield and appreciation. Debt service isn’t a problem since non-financial corporations are flush with cash.

Companies with significant dividends are generating real earnings and real cash flow and almost certainly are managed in a prudent and stable manner.

Consumers, especially when hard-pressed, tend to buy the very best of what they can afford, even if low-priced.

Consumer Staples and Food producers’ equities will remain attractive.

The US dollar will strengthen as foreign nations, notably Japan, competitively devalue.

Health care accounted for 17.9 percent of GDP in 2011, and is growing. Major pharma and biotech stocks are attractive. Many health-care companies pay meaningful dividends.

Medical-office buildings and outpatient facilities demand was forecast last year to expand 19 percent by 2019. Physicians are increasingly moving from small practices to hospital campuses and satellite facilities: 53 percent now work for hospitals. Medical-office building values are much less volatile than those of other commercial and residential real estate, and won’t be afflicted by persistent excess capacity, which hinders new construction, as with residential real estate, malls and office buildings.

Rental apartments will continue to benefit from the separation Americans are beginning to make between their homes and their investments. Empty-nesters will move into rental apartments. Rental demand and rental rates are increasing because of tight lending standards for homebuyers, continuing high unemployment and job risks. REITs containing rental apartments are fully priced, but direct ownership of rental apartments is attractive, with overbuilding still some years off.

Tech will rise in 2013 as companies continue to cut costs and promote productivity – increasing profit through price and volume remains difficult, if not impossible.

Conventional North American energy will benefit from the desire to reduce imports. Buy natural-gas producers, pipelines, oil sands, energy services, oil producers, nuclear energy and shale oil and gas. Avoid ethanol, biofuels, wind, solar, geothermal, electric vehicles and other renewable energy because of their heavy dependence on government subsidies.

Commodities are unattractive: prices have been falling since early 2011, amid slow global growth and mounting inventories, especially in China. Industrial commodity prices will be further depressed in 2013 by continuing global economic weakness and rising inventories.

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