Bail on Junk Bonds, Buy Up Cleantech

It's hard to keep Americans from spending. The U.S. economy is improving at a faster rate than most people imagined it would, and the possibility of a double-dip recession is almost nil. The retail and consumer sector isn't great, but even it is coming in with a 3% growth rate year over year. Since interest rates will go up as the economy improves, I'm very lightly invested in bonds, and our biggest equity positions are in consumer electronics companies—retailer Best Buy (BBY) and manufacturers Sony (SNE) and Panasonic (PC). The consumer-electronics retail sector looks reasonably priced, with 15% earnings growth estimated for 2010, and the stock prices of electronics manufacturers have really strong momentum.

Since we think interest rates are headed up, there's probably as much risk in bonds as there is in stocks now. Junk bonds have been a major part of the portfolio over the last year and a half, and the returns have been terrific. But we've reduced our stake in them from 14% of the portfolio to 3% recently. High-yield bonds have rallied 40% or 50% in the past year and their yield spreads [how much more the bonds yield compared with higher-quality corporate bonds] are no longer so attractive. We've replaced some bonds with high-dividend yield stocks. The Verizons (VZ), the Altrias (MO), the Eli Lillys (LLY) of the world now have 6% to 7% dividend yields.

We've also started to short Treasury bonds. Investors who want to do this on their own could consider a mutual fund [such as Rydex Inverse Government Long Bond Strategy (RYJUX)], which will do the hedging for you. Stay away from the leveraged inverse index funds and exchange-traded funds that give you two or three times the inverse move of Treasury bonds. Those kinds of leveraged funds are too volatile.

In the stock market, we also like some Canadian and Asian banks we consider relatively safe: ones that didn't get sucked into all the problems U.S. banks got sucked into. That includes companies like Bank of Montreal (BMO) and Royal Bank of Canada (RY). Those kinds of banks make up most of our position, but we also have some banks that got into trouble and are undervalued, such as Citigroup (C) and Barclays (BCS). Banking has fallen recently, however, in our rankings of industries.

One of the sectors we're big fans of for the long term is clean technology—wind, solar power, efficient batteries. We can't live on oil forever. We recommend clients have 5% to 10% of their portfolios in cleantech, but we tell them to buy it and put it away for 10 years because these changes won't happen overnight. It's important to stay diversified in this sector since it's so volatile. We recently launched the Leuthold Global Clean Tech Retail (LGCTX) fund for that reason. Some of its biggest holdings are environmental technology company ADA-ES (ADES), SMA Solar Technology, Vestas Wind Systems, and sustainable development engineering company Abengoa. I'm the largest shareholder in the fund.

The Stats: Steve Leuthold is founder and chief investment officer of Leuthold Group, which manages $4.5 billion. The flagship Leuthold Core Investment Fund (LCORX), closed to new investors, can hold almost any kind of stock or bond and can hedge. Its annualized 10-year return of 9.1% tops 98% of peers as of Apr. 23, according to Morningstar (MORN).

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