My friend Victor Bremson offers the following investment advice today.

September 28, 2004

Investment Strategy for the new Millennium‹ (This is not political even if it sounds like it.)

Everyone trying to retire is looking for places to invest their money. Many of us would like to be socially responsible but it is becoming very hard. I was discussing this with my friend Mark today and he gave me some valuable insight that I would like to share.

It begins with the assumption that we are really running out of oil. Mark posits that this maybe the great secret behind the secretive Cheney energy task force. Most energy scientists believe this to be true. (do a Google search "running out of oil" for more background on this.) Americans will not take this message easily. They love their big cars and free energy spending. And before you ask why wouldn't the President try and prepare us for this--- remember that he and his family are real tight with big oil people. Consider the possibility that the Iraqi war isn¹t really about terrorism or weapons of mass destruction or even getting rid of a lousy dictator. (If so what about Iran and most of the third world.) Consider the possibility that the Iraqi war is about ensuring that Americans protect their oil reserves in the Middle East. That would include Kuwait and Saudi Arabia by the way.

Add to this mix our huge deficit which in turn will lead to tremendous shortfalls in social security and other social programs. Read how easily it would be to ensure that trust fund lasts for a long time if the trust fund money is used to pay benefits and not deficits.

I believe this speaks to the following core to an investment portfolio:

1. Oil stocks including new oil technologies for extracting oil shale.
2. Defense contractors.

This of course will probably lead to stag-flation which is a combination of low job growth and low real incomes with high inflation. This suggests:

1. Avoid bonds of any kind until interest rates substantially increase. You will see a major erosion in your principle value.
2. Try to keep bond maturity dates to one year or less in the short term.
3. Obtain the highest possible mortgage at the lowest possible fixed rate. Right now they are available at no-cost 5 5/8% 30 years. The idea here is to pay off this mortgage with lower valued dollars after inflation takes over. The more serious the inflation the bigger the bonus.
4. Consider buying some real estate but stay leveraged.

Now this could lead to less free spending on the part of consumers. During the depression things like movies and beauty salons did very well. People needed some fun and comfort even when things got financially tough. And by the way there are many stories of people who actually enjoyed the depression. People didn't have to work so hard and had more time to get to know their community. But here are some depression ideas to add.

1. Internet/cable companies
2. Video games manufacturers
3. Movie related

You might want to consider some socially responsible funds to help you with your conscience. I am looking for instance for a fund that invests in alternative energy sources. But I will only put a small amount of my retirement portfolio into it.

Victor

War Causes Inflation
This Salon article by James Galbraith, a professor of economics at the University of Texas, points out that war causes inflation, and we are in a war in Iraq. Whatever your thoughts about the war, this seems true, and not likely to end on June 30th. The evidence of inflation's return is all around us: higher prices for gasoline, housing, lumber - heck, even my CPA raised his price this year.

So my thinking today is: plan for inflation's impact on investments. Don't buy long term bonds or CDs, avoid companies that lend money in favor of those that borrow it. Loans will be easy to pay off with tomorrow's dollarettes.

There's an excellent Economist article about the big 3 domestic automakers. The outlook is dire: between their debts, pension and healthcare liabilities, General Motors, (Daimler)Chrysler and especially Ford are on the verge of collapse. They have no free cash flow and their credit ratings teeter on the edge of junk.

Of course, the contrarian will take this as a buying opportunity. Their stock prices are low and going lower. They have a lot of money pass through their hands and if an enterprising CEO found a way to funnel that to some other business (one thinks of GM Hughes), it might work out well.

The Pokeypine is pretty bearish on the next ten years because of the following factors:

• Baby boomers retire. Fewer workers, more elders to support and they haven't saved much, so won't have much to spend.
• PC/Internet boom has run its course. I've made money investing in this for a quarter of a century, but where are the gains now? Biotech and healthcare look promising, but have disappointed so many times. Nanotech is too far in the future.
• World oil production peaking sometime between 2005 and 2045 means higher oil prices, job loss and recession.
• Interest rates are low now and may stay low for years (like Japan) but must inevitably rise. This will hurt business, the stock market and consumers. Home prices may fall, especially in places like California where buyers are forced to go with adjustable rate mortgages to be able to afford a home at all.

So where to invest?

The March 15, 2004 edition of Barron's has a couple of interesting articles. One suggests that a rise in oil prices will especially favor oil production companies, ones that aren't integrated with refining, retail, etc. They have oil in the ground which will become more valuable. Specific companies named are Devon Energy, Apache and Anadarko Petroleum. Oil service companies such as Schlumberger will also benefit. But the production companies are attractively priced with low P/E and decent dividends.

Another article extols Citigroup, the largest financial services company. It has a P/E of about 12, pays a 3.3% dividend, and may have 10% growth this year. A good, conservative investment. Of course, it's a bank and banks fared poorly in the stagflation of the 1970s (as noted earlier), but perhaps they have learned from that era and are less vulnerable now.

Tickers and current prices: DVN 58, APA 42, APC 52, SLB 64, C 50.

As to fixed income, intermediate and long-term bonds are very risky right now, as they will drop when interest rates rise. Money market funds are also looking unattractive as they pay hardly anything. That leaves short-term bonds as the best bet in this area.