Our 2006 Investment Themes

For the foreseeable future, our investment choices will follow a few basic themes:
International (esp. currency)
High Tech
Health
Energy

INTERNATIONAL
The difference between 2005 and 2006 will b ethe value of the dollar. Developing economies like Vietnam, China (yes, still considered a developing economy), Brazil, Russia, etc will continue to march forward. After rising in 2005, however, the dollar is going to drop.
There are many reasons for this, but I'm looking at basic fundamentals of interest rates. The tightening monetary policy is ending with the halt in interest rate increases. The US moved interest rates higher an dfaster than other countries in 2005, and I believe that that is a major reason for an actual increase in the dollar value. That ends in 2006, however, as other countries' interest rates will converge.
Let's same I'm right and the dollar drops 10%. That really means that oil jumps 10% as will other imports. It also makes overseas investments 10% more valuable in dollar terms.
How to capitalize: Raw materials like oil could drop in price even if the dollar falls because other factors can affect supply/demand. Instead, go for a solid overseas fund.
Which regions to target: I like Eastern Europe, Vietnam, & Turkey. Western Europe is migrating jobs to Eastern Europe. Vietnam is growing ~8% annually and is much less tapped than China. Turkey will benefit from the flow of oil from the Caspian, from closing in on EU admission, and from evolving manufacturing. Other region slike Brazil and Russia are really raw material plays - Brazilian steel, Russian oil, and so on. I am not interested in a commodity play, so I would ignore.

HIGH TECH
It's back. As mentioned last month, IT spending at the high end and consumer spending at the low end are driving a boom. Seagate's report last week highlighted this. Seagate has 40% of the hard drive market; hard drives are used in servers, PCs, DVRs, Video game boxes, and iPods. Again - high end and low end. My point is that hard drives are a commodity product found across the spectrum of technology and, as such, are an excellent indicator of this sector. And business is booming: sales surged and, more importantly, so did margins.
This seems to contradict other high tech releases. Motorola and Intel reported earnings that disappointed Wall Street. (I had reviewed Motorola 12/12 and again 1/15 and voted thumbs down.) Intel is losing in a zero-sum game with AMD fighting. Texas Instruments reports tomorrow and is more broad based than Intel (PCs) and Motorola (cell phones).
I think the successful companies will be smaller and more in tune with the internet hardware side of life. Smaller companies with upside growth (like MRVL) tend to attract the best and brightest, further feeding their growth.
How to capitalize: Focus on who benefits from TV and music downloads. We chose MRVL and STX because they operate in both high and low end. We chose Sandisk because they are serving multiple large, growing, high volume consumer markets (digital phones, cameras, and game boxes). And AKAM for the downloading volume.
Given the cyclical nature of these businesses, we won't be here long - maybe a year if all works out.

HEALTH
Health is always a good sector and more so because of the aging boomers and the way healthcare weathers changes in the business cycle. (Keep in mind that we are in year 4 of the cycle, that this has been a fairly tepid cycle, and that we are nearing the slower part of the cycle.) But Health has multiple sectors.
1. Lifestyle - Exercising and eating better are the secrets to wellness. I am still waiting for a gym that targets older folks. In the meantime, WFMI has a strong handle as the portal to healthy food. I would love to invest in some of its vendors - especially Niman Ranch. Travel is another one. I would like to find a travel company that focuses on older people.
2. Medicines - If you can't focus on prevention, focus on treatments. Drug firms with treatments for age related illnesses (Alzheimers, ocular and bone treatments, blood pressure, etc) will benefit greatly. Also companies that develop new techniques or products for surgery, especially heart surgery (stent manufacturers, pacemakers, vascular surgery, etc). Otherwise, I would avoid the standard drug companies (see next).
3. Generic drugs - Generic firms are growing by leaps and bounds. two major issues here: first, the US subsidizes drug development through higher prices and, second, very few new drugs have really emerged in recent years. The first is going to be changed as states move to lower costs. California, for example, recently voted on price negotiations with drug companies. While drug companies focus so much lobbying on the Fed, they seemed to have ignored the states. Buying through Mexico and Canada will surge as well. And so will generic drug companies. Drug cost containment will happen, and it will hurt the major drug companies. TEVA and ESRX strike me as being at the right place, but I will need to do more checking around.
The dirty secret of drug companies is that they have exhausted most avenues of new drugs. They are busy tweaking existing drugs and getting them re-patented. Sure beats working, eh. Most major drugs are coming off patent soon. Expect intense lobbying for additional congressional patent protection. This worked for Disney which got copywrites extended to 100 years. It won't work this time. I see consolidation and snapping up of smaller firms with one or two products.
The companies doing the real development are biotech firms performing genetic research. That is where the growth will come, but not for years. Genentech was bought out because of this avenue to growth.
4. Cosmetic surgery - At the moment cosmetic surgery is very individual specific. Could a chain of cosmetic surgery outlets emerge? Sure, for certain basic surgeries. Going forward, the way to take advantage is with drugs and treatments. I am looking for the right companies in this space.
5. Infotech - Hospitals are one of the least digitized industries in the US. It is all paper based. CERN is a leader in the trend to bring hospitals into the digital information age.
6. Housing - Where will aging boomers live? For those with special health needs, high end communities as provided by SRZ. I think a different trend will emerge, building on the migration to Arizona and Nevada and Florida. Communities will grow in Mexico. After all, housing is incredibly cheaper and medicine is a 1 or 2 hour flight away. I would like to find a company specializing in setting up these communities because I know that they are already popping up.
7. Waste disposal - Add more old people to rising health concerns, and you get more medical waste. SRCL is the largest waste disposal company, and they are global.
Quite a lot of niches, and many of these solutions translate nicely to other countries.
How to capitalize: We had CERN and we have GILD. I need to look closely for a few more firms.

ENERGY
As with healthcare, there are several areas at play here
1. Oil - I predicted last week that it would rise because of Iran, and I was right. (A real leader would stand up and say: we need to lower dependence on oil and that will be painful in the short term but economically and morally correct. John McCain said much of that this weekend and he is running for 2008 Presidential campaign.)
Oil will continue to rise as both the dollar sinks and nervousness grows. Can we do an embargo on Iran? Iran can not weather an oil embargo and neither can we. But an embargo exluding oil could succeed without impacting oil supplies. Uncertainty drives oil prices, and that uncertainty is growing, not receding.
2. Natural gas and coal and Nuclear energy - Watch them rise ever higher.
3. Storage and shipping - Demand is growing for more and more infrastructure.
4. Alternative energy - The time has come. Rising oil prices are definitely making solar and wind more attractive. But these technologies are getting cheaper in their own right. While the return is not quite there, the interest is high and governments will be expected to offer tax incentives. DESC and ENER look more attractive than ever before, but I am looking for others as well.
How to Capitalize: I don't like oil and other commodities. I prefer the equipment companies that service them because they are less susceptible to spot price fluctuations the way pure oil plays are.
We have MDR - a uranium, coal, and petroleum play in one. We have JOYG, a coal and mineral extraction play. We have added GRP for oil drilling equipment. We also have JLG for construction especially of platforms. I am watching JLG for signs of weakness because I don't know how much leg they still have and we have already achieved 31% on them in 11 weeks.
We do not have alternative energy.
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We are not sufficiently taking advantage of international growth or healthcare.
We have ourselves sufficiently covered in technology.
We are sufficiently protected from the volatility of oil while taking advantage of its ongoing growth. We need to take advantage of alternative energy.
We are not sufficiently immersed in healthcare.

We are also ignoring housing.