Outlook and Recommendations from Goldman Sachs and J.P. Morgan for 2010

by Randy Smotone

 

Wall Streets top investment banks are bullish on 2010 based on the following:

  • Low rates - Easy fiscal and monetary policy
  • Better than expected growth - Expanding economy and growing corporate profits
  • Lower than expected inflation
  • Continued growth in emerging markets

Even though Wall Street is bullish, the expectations are for modest single digit returns with several intra-year ups and downs.  Don't expect the extreme returns of 2009 to be repeated in 2010.

We will use the information provided by Goldman Sachs and J.P. Morgan as a starting point for our own analysis.  We will monitor their ideas throughout the year and apply the appropriate strategies to match the current market conditions. 

 

Goldman Sachs

Goldman Sachs predicts that 2010 will look a lot like 2004.  Cyclical sectors and energy should outperform the broader market.  Timing entry and exits will be key, as well as identifying the right securities to be long and short.

If 2010 is like 2004, note the ups and downs of the SPX in 2004.  The first 2 months of 2004 started off well, then we started getting choppy until we bottomed in early August.  After August, the SPX improved through yearend.

Cyclical stocks to consider: AA, CAT, CMI, DE, DOW, EMR, F, FDX, HON, HPQ, IP, IR, JCI, JOYG, PPG, TIN, WHR

Energy stocks to consider: OIH, APA, APC, ARD, ATPG, BP, BRY, CHK, COP, CVX, CXO, EOG, HES, HK, IOC, LINE, NEP, NOG, OXY, PBR, STO, SWN, VNR, WLL, XOM

Another idea from Goldman Sachs is to short volatility.  Of course, you could just short the VIX, but I would prefer to leverage other option strategies.  Strategies to consider:

  • Covered Calls
  • Collars
  • Vertical Spreads
  • Naked Puts

 

Goldman Sachs emerging market recommendation is Long Russia.  You can play this via the Russia ETF (RSX) or through Russia ADRs:

  • Gazprom (OGZPY)
  • Lukoil (LUKOY)
  • Vimpelcom (VIP)
  • Central European Media Enterprises (CETV)
  • CTC Media (CTCM)
  • Central European Distribution (CEDC)
  • Mobile Telesystems (MBT)
  • Wimm-Bill-Dann Foods (WBD)
  • Mechel (MTL)

 

J.P. Morgan

J.P. Morgan envisions significantly higher global growth and lower core inflation.  They are bullish on emerging market equities, corporate credit, and currencies .  They are bearish on the U.S. dollar.  They're expecting precious metals to outperform.

The easiest way to play emerging markets might be through the ETF (EEM).  The ishares Emerging Markets ETF (EEM) was up about 68% for 2009.

There are many excellent emerging market stocks that trade in the U.S. as ADRs, as well as Country specific ETFs.  Please refer to our "Master List" section of the website for our top picks in Global Growth Stocks and ETFs (updated weekly).

J.P. Morgan also likes overweight in corporate credit.  You might consider playing this using ETFs SPDR Barclays Capital High Yield Bond (JNK) and ishares High Yield Corporate Bond Fund (HYG).

Another idea from J.P. Morgan is to short U.S. agencies and mortgage backed securities (MBS) outright.  There is an ETF that tracks mortgage backed securities (MBB).  The MBB has already started to decline.

The best way to play this may be through equities in the mortgage space via derivative shorts.  Here are some names to consider:

  • Annaly Capital Management (NLY)
  • Capstead Mortgage (CMO)
  • Hatteras Financial (HTS)