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For 2009-2010: Invest in this, not that.

Posted on | June 22, 2009 |

Remember that old adage, “If you can’t beat them, join them”?

Well, a lot of people have come around to that line of thinking when it comes to the stimulus and bailout madness gripping Washington D.C. these days. Hey - we’re paying for it, why not profit from it, right?

Well, profiting from it may not be as straightforward as it seems…

Bonds.

Freddie and Fannie, not ‘private’ banks.
Avoid banks, since their profitability is suspect for the foreseeable future. Instead, buy Fannie and Freddie since they are directly backed (controlled) by the federal government whereas the banks are managed through TARP. Best buy for Freddie Mac and Fannie May Debt bonds is Vanguard Short-Term Federal Fund (VSGBX) This fund has beaten 89% of its peers over the past 3 years with returns of 6.3%.

Munis, not Infrastructure.
It’s easy to see why many investors would be tempted to buy infrastructure bonds, since much of the press surrounding Obama’s stimulus spending has been focused on infrastructure spending on roads and bridges. But the problem is that many states are deeply in the red and much of the stimulus spending will only offset the construction costs and not produce any real return. A better stimulus play is to invest directly in municipal bonds. Municipalities are getting a quarter of the stimulus on top of a federal bailout. The effect is to prop up the repayment of the municipal bonds, which have been yielding quite high lately. Best bet here is the diversified Vanguard Intermediate Term Tax Exempt fund (VWITX)

Stocks.

Big Pharma, not Health-Care IT.
Much has been made of the increased spending in the push to modernize hospital record processing and the like, resulting in a rise in the price of health care IT stock. At the same time, shares of big pharma companies like Pfizer, Merck and Johnson and Johnson have been hammered due to the fears that the Obama administration will seek to severely curtail their profitability. The result is over sold stocks of solid companies - just don’t expect eye popping returns for the next 4 years. Best play here is the iShares Dow Jones US Pharmaceuticals (IHE)

Old Energy, not Green energy.
The green energy market is over populated with tiny companies all competing for the Stimulus funding, so it’s going to be difficult to pick the winners. And that’s if green energy becomes profitable! The better play is fossil fuels, for 2 reasons - 1) They’re oversold, 2) they will likely be the ones to profit once green energy becomes sustainable.

They’re oversold for the same reason big Pharma is oversold - perception that Obama and the Democrat control congress will seek punitive measures on oil companies. This may or may not come to pass, but it is likely these stocks have been beat up too much. The other reason is what my post Why Investing in Alternative Energy Companies is a Bad Idea is all about.

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Comments

2 Responses to “For 2009-2010: Invest in this, not that.”

  1. hangover cure
    June 28th, 2009 @ 4:23 pm

    This is a great article, thank you. I am just getting some cash together and am looking for some good buys in 2010.

  2. Frima
    June 29th, 2009 @ 11:31 am

    Nice,, post .. stay good post

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