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Harry Newton's In Search of The Perfect Investment Technology Investor. Harry Newton

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9:00 AM EDT, Monday, October 5, 2009: The media is right to focus on jobs. Without jobs, the 70% of the economy that is consumer-driven will suffer. Last week's job numbers were awful. The total loss of jobs since the recession began in December 2007 is now 7.2 million, taking the total unemployed in the economy to 15 million. The private sector in September lost 210,000 jobs. The unemployment rate rose from 9.7% in August to 9.8% in September 2009, a 26-year high. The long-term unemployment rate (including the marginally attached job seekers and workers who are discouraged or are working part-time because they can't get a full-time job) rose from 16.8% in August to 17% in September 2009.

Is it all over for the stockmarket bounce? On Friday I said since Wednesday, September 23 it's been downhill. Though the charts show "only" a 4% drop, it feels a lot worse. I'm still mulling. But then so are many money managers. This weekend's BusinessWeek magazine had a two-page piece. It's worth reading:

Fund Managers Bracing for a Sell-Off
Bear tactics: How a handful of gloomy fund managers are preparing for a sell-off.

Investors have a right to feel sunny. The recession has most likely ended, analysts are raising predictions for third-quarter earnings, and the Standard & Poor's 500-stock index is up 56.8% since its March low. So why are some prominent fund managers feeling gloomy?

All of the managers featured in this story bumped up equity exposure in their portfolios earlier in the year—they are not permabears. But some look at the economy and still see troubling signs of stress. Others have analyzed the stock market's rally and determined that it may have come too far, too fast, and are preparing their portfolios for a market sell-off.

The Hedger
JOHN HUSSMAN, President, Hussman Investment Trust
During the first quarter of 2009, when the S&P 500 fell 12.7%, John Hussman watched the $5.2 billion Hussman Strategic Growth Fund (HSGFX) gain 7%. That wasn't the result of brilliant stock picks, although his selections did outperform the market. Rather, it had to do with a strategy Hussman uses to hedge his portfolio with option contracts. He has employed it since opening his Ellicott City (Md.) fund shop nine years ago.

Hussman sells calls (options betting that the stock market will climb) and buys puts (options betting the market will fall) on the S&P 500, Russell 2000, and Nasdaq 100. When he hedges the entire dollar value of his portfolio, as he did at the start of 2009, he's betting that his stocks will gain more (or lose less) than the general market. As a result, he should make (or lose) the difference between the return on his stocks and the overall gain or loss from his hedges. So while his stocks rose just 1.45% from January to March, his fund was up 7% because the market dropped 11% and his hedges paid off.

As the market turned in March, Hussman stuck with his portfolio of companies with stable sales and operating margins, including AstraZeneca (AZN), which is 3.5% of the fund, and Johnson & Johnson (JNJ), at 3.19%, rather than follow the crowd into beaten down financials and cyclical stocks. He also bought call options, a bet that the stock market would rise. That gave him exposure to the overall market without having to buy companies he didn't want to own for the long run.

As the market climbed, so did the value of the options, reducing some of the fund's losses from hedging. (It was down 0.8% in the second quarter, compared with 23.8% for the S&P 500.) But in late September, he sold the call options, judging the market "strenuously overbought." Translation: Stocks are not cheap. He calculated that at current prices, stocks would return just 6.6% annually, well below their historical levels of about 10%. Market volume, too, has been underwhelming, an indication that many investors prefer to sit on the sidelines. Add in tough economic conditions, and the rally could be coming to an end. "I'm extremely concerned we've put a Band-Aid over an infection," Hussman says.

The Technician
BARRY JAMES, President, James Investment Research
Back in February, Barry James, president of Xenia (Ohio)-based James Investment Research (GLRBX), started adding stocks to the $545 million James Balanced Fund. His timing was off—it usually is, he says, since the technical indicators he follows tell him what's going to happen but not when. Nevertheless, he continued buying equities through the market's low and into April and May, bringing the fund's equity position from under 35% to 55% at its peak. (In a "normal" market, James usually has a 50/50 split between stocks and bonds). But like Hussman, James thinks the market has overreached. During past rallies from extreme sell-offs, markets peaked when 70% of stocks had traded above their 50-day moving average, or the average stock price over a 50-day period. That number is now near 90%, says James.

Investor sentiment has reversed from March lows as well. Then, the investor sentiment surveys James follows showed most shareholders to be bearish. Now less than 30% of investors say the market is due for a near-term fall. "That's never a good sign," says James. He expects a drop of at least 20% in the next few months and has cut his fund's stock position to 40%. He is putting money into sovereign debt from countries such as New Zealand and Australia that offer higher rates than do U.S. Treasuries. He also likes gold and silver producers, including Barrick Gold (ABX) and Silver Wheaton (SLW), which should benefit if the dollar continues to fall. The James Balanced Fund is up 5.91% this year, after being down 5.5% in 2008.

The Fundamentalist
JOHN LEKAS, Manager, Leader Short-Term Bond Fund
On Mar. 31, John Lekas, the Portland (Ore.) manager of the $205 million Leader Short-Term Bond Fund (LCCMX), predicted that the Dow Jones industrial average would hit 9,600. For clients whose money he manages outside of his fund, that meant a move into stocks. But when the Dow hit his target on Aug. 25, Lekas didn't like what he had seen. The market's rally was driven by sentiment, and the fundamentals hadn't improved enough to justify those gains, he says. There was still too much debt on corporate balance sheets, with around $2 trillion, or 65%, coming due in the next four years.

While refinancing most likely won't be a problem, he says, the new debt will be more expensive, so simply making interest payments will eat up more cash. Meanwhile, companies will find it difficult to boost revenue to make up the difference. To maintain profits, they'll need to lay off more workers. Lekas believes unemployment could hit 16% by the end of 2010. That poses a problem for the markets. "If you don't have real organic growth, you're not going anywhere," he says. By yearend, Lekas expects a Dow of 6,300, a 35% loss from today. He's dumped most of his equity positions in favor of cash, Treasuries, and short- term bonds. (He made a similar decision in January 2008, protecting his clients from much of that year's losses.) Only 10% of his clients' portfolios are in stocks.

The Stockpicker
SHAHREZA YUSOF, Head, U.S. Equities Aberdeen Asset Management
Aberdeen U.S. Equity fund (GXXAX) had a tough 2008—the large-cap growth fund lost 41%—and this year began with more of the same. "The world looked like it was going to end," says Shahreza Yusof, head of U.S. equities at the U.S. affiliate of global money manager Aberdeen Asset Management. "And there's no point investing in an end-of-world scenario." Instead, the fund held on to its financial stocks even as the crisis deepened. Top holdings (as of Aug. 31) such as Oracle (ORCL) and Philip Morris (PM) International helped it gain 29.9% this year.

Lately, Yusof has been lightening up on stocks that have had the largest gains since their 2009 lows. From June to Aug. 31, the fund cut back on shares of graphics-processor maker Nvidia (NVDA) by 37% and info tech provider Cognizant Technology Solutions (CTSH) by 27%. Yusof moved the money into stocks that have lagged the market, boosting positions in Kellogg (K) and medical-supply company Baxter International (BAX) by 50%.

Clunkers in Practice. From today's Wall Street Journal:

One of Washington's all-time dumb ideas.
Remember "cash for clunkers," the program that subsidized Americans to the tune of nearly $3 billion to buy a new car and destroy an old one? Transportation Secretary Ray LaHood declared in August that, "This is the one stimulus program that seems to be working better than just about any other program."

If that's true, heaven help the other programs. Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted.

Cash for clunkers had two objectives: help the environment by increasing fuel efficiency, and boost car sales to help Detroit and the economy. It achieved neither. According to Hudson Institute economist Irwin Stelzer, at best "the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day's gasoline use." Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer.

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, "Economics in One Lesson," you can't raise living standards by breaking windows so some people can get jobs repairing them.

In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

You'll never eat another hamburger after this. Sunday's New York Times' lead story was "The Burger That Shattered Her Life. Trail of E. Coli shows flaws in ground beef inspection system. The long investigative article begins

Stephanie Smith, a children’s dance instructor, thought she had a stomach virus. The aches and cramping were tolerable that first day, and she finished her classes.

Then her diarrhea turned bloody. Her kidneys shut down. Seizures knocked her unconscious. The convulsions grew so relentless that doctors had to put her in a coma for nine weeks. When she emerged, she could no longer walk. The affliction had ravaged her nervous system and left her paralyzed.

Ms. Smith, 22, was found to have a severe form of food-borne illness caused by E. coli, which Minnesota officials traced to the hamburger that her mother had grilled for their Sunday dinner in early fall 2007.

“I ask myself every day, ‘Why me?’ and ‘Why from a hamburger?’ ”Ms. Smith said. In the simplest terms, she ran out of luck in a food-safety game of chance whose rules and risks are not widely known.

Meat companies and grocers have been barred from selling ground beef tainted by the virulent strain of E. coli known as O157:H7 since 1994, after an outbreak at Jack in the Box restaurants left four children dead. Yet tens of thousands of people are still sickened annually by this pathogen, federal health officials estimate, with hamburger being the biggest culprit. Ground beef has been blamed for 16 outbreaks in the last three years alone, including the one that left Ms. Smith paralyzed from the waist down. This summer, contamination led to the recall of beef from nearly 3,000 grocers in 41 states.

You should read the rest of the piece. Your children should read it. Click here.

What to buy me for Hanukah. Or, preferably, a loved one you care about. PCWorld has a really super "Holiday Tech Gadget Preview" with 16 must-give gadgets. I'd happily accept about 12 of them. They range from a wireless digital picture frame "on steroids," made by HP, to a wonderful GPS tracking devices for kids or cars (or whatever), to a stowaway home theater system, to a specialized Skype video terminal, to a device for your car that lets you respond to emails and text messages by speaking to your BlackBerry -- never touching it, to peel-and-stick wireless security cameras.

To get the full skinny on the 15 gadgets, go here and click on each of the photos on the scroll bar.

Cheap BusinessWeek subscription. Only 60 cents an issue. Click here.

Big travel bargains in Hawaii. Hotel occupancy is way down. Room rates have dropped to affordable.

Animal logic, Part 1:

Animal logic, Part 2

David Letterman's wisecracks.
David Letterman has made late-night hay of high-profile sex scandals, but now that he's joined their ranks, some of his old wisecracks may be hitting too close to home:

+ I really have to hand it to the White House. Around here, we can't even get the interns to work the copy machine.

+ President Clinton has gotten himself a new dog . . . He's teaching the dog to sit up, to beg, to roll over -- you know, just like he did with the interns.

+ The big new scandal breaking here in New York, Eliot Spitzer apparently involved in some kind of prostitution activities - you know what that means: hookers. And right now, Spitzer is huddling with his advisers to develop a drinking problem.

+ Gov. Mark Sanford disappeared . . . It turned out he was in South America. And then it turned out he was down there because he was sleeping with a woman from Argentina. Once again, foreigners taking jobs that Americans won't do.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.