Since you opened the Pandora's Box of active investing, Jim, here are my own thoughts.
I agree with you completely. The euro's run is unsustainable. The European economy has never been that dynamic, and with the wheels coming off the bus in Spain, the jig is up. That's particularly true with a change coming in the U.S. political scene, which should help restore some confidence in America (and by proxy in the American currency).
Curiously, U.S. investors can actually benefit from a rising dollar now, thanks to the PowerShares DB US Dollar Index Up ETF (AMEX: UUP). I wonder if we'll see an uptick in assets in that fund.
There will eventually be a rebound in Financial stocks eventually, but it remains to be seen how strong it will be. The Financial boom of the last decade came during a period of massive deregulation, reduced oversight and tremendous leverage. Something tells me that environment is going to change.
As I see it, the credit crisis is still in its middle stages. It's been coming in waves: first Countrywide, then Bear Stearns, then IndyMac, then Fannie Mae, etc. I suspect we'll see another wave soon, as banks are forced to take more charges against newer nonperforming assets. Remember, delinquencies are rising sharply outside the "subprime" market: Delinquencies in Alt-A mortgages tripled to 12% in April from a year ago, and trouble is rising in prime mortgages, too. Even car loans and credit cards are seeing problems. This market won't bottom until the housing market rebounds, and I think we're a ways from that yet.
I am absolutely convinced on China long term, and think that most index investors are woefully underexposed to this market. Remember, because so much of the market capitalization of China is off limits to investors (mostly because it's held by the government), most global indexes weight China on par with countries like The Netherlands! In fact, China already has the 3rd or 4th largest GDP in the world, and it's growing fast. I think most index investors need more China in their portfolios.
That said, China is a bit of a mess right now. Domestic markets are down 50% from their peaks and routinely bounce around 4%-6% per day. Inflation is running at 10% per year. The pre-Olympics buzz is over. Long term you can't go wrong, but the next year or two could be dicey.
Short Consumer Discretionary
I'm guessing this will be the worst Christmas for retailers in 20 years. Consumer spending has held up recently in large part due to the stimulus checks, which studies show have been spent aggressively by consumers to make up for the impact of rising energy prices. But as those checks run out—and as high gas, heating oil and food prices take their toll—there's going to be cutbacks.
Healthcare's a mess. The big pharmaceutical companies have lost their mojo: They became desperately risk-averse in the 1990s, focusing on "me-too" drugs and worrying about patent protection instead of real innovation. They've finally gotten it—most of the major pharma companies have overhauled their R&D departments and are pouring money into innovative research again. But that effort won't pay off for another 10 years. In the meantime, they've got trouble.
Biotech, meanwhile, has become a huge profit center and is by any measure the future of healthcare. All the jumble of data flowing out of genetics is now turning into real treatments. This is already translating in the stock market, where biotech has been one of the best-performing industries this year. Many biotech indexes are now trading at or near all-time highs, and I'm guessing that strength continues.
My Own Portfolio
If anything, these kinds of tweaks and trades should make up a small section of your portfolio—5%-10%, with the rest dedicated to long-term indexing. The market's too interesting not to take any positions—my three favorite long-term portfolio tilts are China, biotech and wind energy—but that's only on the edges of a portfolio. Long-term market-cap-weighted indexing at the core.