Investing
With stocks flat so far this year ... It’s time to rethink investing choices.

Real estate is luring too much capital. So the investment risk is rising. From March 2004 to March 2005, the median price for homes rose 9.4%, but the gain was uneven. Some buyers are paying so much that the rent they collect won’t cover their expenses. If prices fall, they’ll lose money two ways.
The best gains are also past for REITs. Real estate investment trusts won’t come close to repeating their 30% gains of 2003 and 2004.
But you can still find some 7% yields from REITs that own bank and hotel buildings.

The bond rally won’t last much longer. Treasury prices have been rising for some time amid demand from foreigners awash in dollars and a move out of corporate and junk bonds.
Demand will ease off in coming months, though, driving yields higher and prices lower. It’s best to avoid bonds or bond funds for now.
Nor are commodities very attractive. Prices will peak soon as weakening global growth lessens demand. Gold has lost its luster. Always iffy, it’s especially so with no sign of inflation running away.

That leaves stocks ... by default, still the best investment choice for the next 12 months or so. Economic growth will slow only modestly. Oil prices are stable, inflation is mild, and Fed rate hikes will end early next year. And earnings for S&P firms will end the year up 10%.
Look for an average 9% return for the S&P 500 over the next year, 7% through appreciation and 2% in dividends, beating all the competition.

Best bets? Big growth companies, individually or through funds such as T. Rowe Price Growth Stock or Fidelity Capital Appreciation.
And stocks that yield 3%-4%: AmSouth Bank, Dow Chemical Company, U.S. Bancorp, and Verizon, for example. Or pick a fund focusing on stocks paying high dividends, such as iShares Dow Jones Select Dividend Index, American Century Equity Income, or Fidelity Dividend Growth.
Consider putting 15%-25% of your equity funds in foreign stocks, even European multinationals, which aren’t affected all that much by Europe’s slow economies. Also try the Dodge & Cox International fund.
And for a risk-free investment, look at certificates of deposit. After recent Fed rate hikes, a one-year CD yields as much as 4.1%. That’s not bad for anyone who depends on a safe, steady flow of income.

Energy
Shaky supplies mean lofty petroleum prices again in 2006.
Expect crude oil prices to average at least as high as this year, despite a slight decline in oil demand as global economic growth slows.
Gasoline and diesel prices will go higher than they are now ... 10-15¢ more per gallon for gasoline, on average, and 5-10¢ more for diesel. That’s because motorists’ thirst for fuel won’t abate. Any easing in energy demand growth will come on the industrial side.

Expected growth in oil exports is evaporating in six nations that currently provide 45% of U.S. oil imports, heightening supply woes.
The biggest concern is Venezuela, which supplies about 13% of U.S. oil imports and nearly 17% of gasoline imports. The real threat of a nationalized Venezuelan oil industry unnerves oil traders.
Mexico is worrisome, too. The country’s likely next president, Andrés Manuel López Obrador, leftist mayor of Mexico City, will cut funds to Mexico’s state oil company, scrapping its plans to boost production.
And Nigeria, Angola, Russia, and Iraq all have production woes.

The dearth of gasoline refineries won’t be eased anytime soon. Leaders of industrialized nations are talking up the need for incentives to expand refining capacity to meet rising global demand for gasoline. But environmentalists and other opponents will continue to stymie plans.
Geothermal heat pump systems are coming on like gangbusters. They are not cheap, typically costing about four times as much as a furnace and air-conditioning together. But they can save up to 80% on heating and cooling bills. Geothermal systems are even more attractive in the 22 states that offer incentives to businesses and homeowners.

World business
More U.S. manufacturers are opening plants in Mexico and Canada, instead of China, India, Malaysia, or other cheap-labor havens. “Nearshoring” offers the firms several advantages over offshoring: U.S. parent companies find that transportation is cheaper and faster, allowing them to respond more quickly to changing customer demands. Plus the proximity makes it easier for U.S. managers to tackle problems.

A bid to make foreign firms reincorporate in Japan won’t fly. Intended to crack down on tax evaders, the proposal is giving fits to U.S. companies that would be forced to pay additional taxes and fees. It also goes against efforts to lure more foreign investors to Japan.

Former enemies are about to become much closer trading partners.
The U.S. will back Vietnam’s bid to join the World Trade Org., despite rampant product counterfeiting there. Washington believes that curbing the practice will be easier if Vietnam is in the WTO. Odds are that Hanoi will get the OK to join the trade body by year end.
The move will spur U.S. exports to Vietnam, already way up since the two countries normalized relations 10 years ago this summer. U.S. industries most likely to benefit include telecommunications, IT, oil and gas, power generation, airport equipment, and medical supplies.

© 2005 The Kiplinger Washington Editors, Inc.