Moneynews.com
1. How Solid is Gold?
Portfolio managers say investors who don't invest in gold are making a big mistake.
Barton Biggs, Morgan Stanley's global strategist and former gold bear, is now a gold bull.
"A horse I've never believed in is gold, for all the conventional reasons," he tells the Financial Times. "But now I am changing what's left of my mind."
Gold is a long-term store of value as well as a liquid, internationally-recognized asset of last resort. Experts say it can diversify and stabilize a portfolio.
In the event of a full-scale war with Iraq, gold prices could shoot higher, although historians note during the Gulf War gold rose temporarily and then fell back as the war was seen to be moving against Saddam Hussein.
Although investment demand for gold has picked up, the market is still relatively small. The Financial Times reports only 10 percent of the demand for gold is for investment purposes compared with 80 percent for jewelry. And gold mining stocks are also a tiny market. Global mining experts believe current share prices are being discounted.
Since the market is so small, any further increase in demand can have a big impact on the price.
Financial advisers warn investors need to treat the metal as a trading asset and not a buy-and-hold investment.
2. Searching for Profits - It's Possible
The stock market is pitiless - it's the second-worst bear market since the Great Depression - but profits are possible.
Kiplinger's Personal Finance suggests giving stock-picking a rest and opt for mutual funds instead. One noted do-gooder in today's market madness: Royce Opportunity Fund, which has jumped nine percent since March 2000 and invests in small, undervalued companies.
The fund's mission: find businesses whose pieces would fetch more than the company's stock market value, companies that recover after missteps, companies that are cheap growth stocks, and those companies that have collapsed after their initial public offerings.
It seems to be working. The fund earned an annualized 17 percent over four years ending July 1, beating the Russell 2000 Value Index, which posts a seven percent gain per year.
Clearly small-cap momentum is very strong, says Roger Ibbotson, professor at Yale School of Management. He adds that since World War II, periods during which small stocks outpaced large ones have averaged five years.
But Kiplinger's notes there are no certainties in investing. Ridding your portfolio of funds that invest in large companies would be a mistake.
In this time of uncertainty, Kiplinger's says small dividend payments can mean a lot. Clipper Fund has outpaced its peers by investing in large, dividend-paying companies, yielding 1.3 percent last year.
Kiplinger's suggests most investors should have about 40 to 50 percent of their assets devoted to stocks of large companies with the bulk of that in funds that own undervalued stocks.
3. Dow 3,600?
Pessimists argue investors should start planning for Dow 3,600.
Nelson D. Schwartz of Fortune Magazine writes while he doesn't believe the perma-bears are right, given the mess out there, the pessimists are worth hearing out.
The bearish case isn't as far-fetched as you might think, he says. Stalwart companies like Ford Motors are near lows not seen since the recession of 1991. The worst losses have occurred in sectors such as banks and utilities.
And equities are not cheap, even with the beating the market took so far this year. The typical S&P 500 stock is selling at 17 times this year's projected earnings. Portfolio managers say we are making up for the late 1990s partying.
History haunts the most pessimistic market watchers these days. Many bears are using the 1973-1974 market decline as a guide. Similarities exist: threats of war, problems overseas, and an ensuing oil embargo. Plus, the crisis of confidence shot Wall Street in the arm, only it was Watergate. Today, it's Wall Street; perhaps a self-inflicted wound.
Financial experts tell Schwartz things will get worse. They say the situation is more analogous to the U.S. in the years following the Crash of 1929 and expect earnings growth to remain in the doldrums until 2005.
The biggest bear scare is deflation. If it hits, as several bear pundits believe it will, companies will have little ability to maintain prices, let alone increase them. Earnings will plunge as prices decline.
Jeremy Grantham, a Boston-based money manager, tells Fortune Magazine the market is also overvalued, but refuses to make predictions.
"There are no rules," he says. "Who knows where the bottom will be some ugly August afternoon? Based on past bear markets, it would be almost unusual not to reach the 5,000s, and typical to go to the 4,000s."
4. Short-seller Racks Up 66% Profits
"We had a party that wouldn't stop that essentially was like being on cocaine and tequila," says Prudent Bear money manager David Tice. "Now we have a hangover, and we're paying the price for it."
But Tice is not, notes Business Week. In fact, his party is just getting started.
His Prudent Bear mutual fund is up 65.9 percent, while the S&P 500 index is off by at least 26 percent. Over the past two-and-a-half years, Prudent Bear was up 107 percent versus a 30 percent drop in the S&P 500.
"We're making good money," Tice says. "But I'm not cheering for any of this."
When the market is good, he adds more long positions. Business Week reports Prudent Bear is 65 percent short, 20 percent long, and 15 percent in cash.
Tice's secret? He highlights the potential pitfalls on Wall Street. But he hasn't always been profitable. When he launched Prudent Bear in 1995, the fund racked up losses as the market celebrated huge gains. Still, he hung in there, adding that his bear case is based on solid analytical research of individual companies, the stock market and economic history.
His determination has paid off. His current faves include gold stocks, in which he has long positions, and two-year Treasury bonds.
His advice for investors: Think like a squirrel in terms of storing their nuts and take care of their finances. |
