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Strategies & Market Trends : January Effect 2003 -- Ignore unavailable to you. Want to Upgrade?

To: Londo who wrote (222)	3/17/2003 11:00:01 AM
From: RockyBalboa	Read Replies (1) \| Respond to of 666

Bought Euros. They are cheap, and talk about running stops at 1.07. Easily worth 1.15 in my opinion (which can be obviously wrong). It was perhaps the hardest thing to do right now, but then, why should it be worth that little all for sudden,... edit, nice grub you got..

To: Londo who wrote (222)	5/11/2003 10:48:18 AM
From: RockyBalboa	Respond to of 666

Dreman - Avoid the Bond Trap David Dreman, 05.12.03, 12:00 AM ET What's the safest place to be as the economy enters the post-Iraq phase? Out of fixed-income securities like medium- and long-term Treasurys. Into high-yield stocks. Whether it takes another few weeks or longer to detoxify Iraq after the Saddam gang's departure, investors are still faced with a serious problem. With continuing disappointing economic news, falling earnings expectations and high valuations, the stock market hardly looks attractive today. Real estate, gold and collectibles are also faltering. Only bonds have continued their spectacular upsurge. Over the past three years of bear markets the 30-year Treasury has shown an annualized return of 9.7% against a drop of 12.4% annualized for the S&P 500. But don't bet this strength in bonds will continue. Long-term bonds are as overpriced today as stocks were at the height of the bubble in early 2000. The reason bonds are due for a fall is simple: inflation. There are three forces pushing for inflation. 1) The Federal Reserve is printing paper to energize the economy. Twelve rate cuts have put the Federal funds rate at a 41-year low. The money supply is increasing fairly rapidly, currently at a 6.3% annual rate. 2) These normally expansionary Fed actions come at a time when prices are likely to rise anyway, as a result of higher oil prices. (Despite a recent pullback, the trend for several years has been up.) Oil accounts for 40% of the cost of petrochemicals and 25% of the cost of food, and a smaller but significant fraction of costs in a host of other industries. Many industries, now operating on very thin margins, will have no choice but to hike their own selling prices. 3) Finally, the budget deficit at $304 billion today will increase by $75 billion to $100 billion, and perhaps considerably more, once all the bills come in for Iraq. The passage of further tax cuts to spur the economy will also increase future deficits and thus inflation. Even in a lackluster economy these forces could result in accelerating price increases. It's fair to assume that any sustained business pickup would cause still more upward pressure on prices. It's only fair to note that Alan Greenspan doesn't see things this way. But then again he was too optimistic during the late 1990s. If this scenario plays out, owning mid- or long-term Treasurys is a losing strategy. A 10-year Treasury bond today yields 3.9%, while a 30-year Treasury yields 4.9%. Combined federal and state taxes for an upper-middle-income owner deplete these yields to 2.2% and 2.8%. Now subtract inflation at its present 3% rate. You wind up with a negative aftertax real return. This situation cannot last for long. Taxable investors who own these bonds will unload them, pushing prices down and yields up. How bad is the risk? If interest rates increased by only one percentage point from their 40-year lows, a holder of a 10-year Treasury would see its value decline by 7.8%, while the holder of the 30-year bond would see it decline by 13.7%. If inflation spiked and interest rates rose by, say, three points, the 10-year bond would lose 21.4%, the 30-year, 33.7%. This has happened before, in 1980-81, when long Treasurys yielded 15%. What are your alternatives? Nothing that promises to deliver great riches, as tech stocks did in the last decade, or bonds did more recently. One option is to own Treasurys of very short maturity, say, 18 months or less. Staying hunkered down in this fashion will give you a -2% aftertax real return. But that beats a 7.8% to 33.7% capital loss (before taxes and inflation). A second alternative in the current depressed stock market is to buy a diversified portfolio of financially strong, high-yielding stocks. This strategy should provide you with some protection from inflation--unlike bonds, stocks can hold their real values through decades of inflation--not to mention good old income. We don't know when, but someday the market will recover and you should see some good appreciation.