Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
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
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:
Bracing for a Sell-Off
Bear tactics: How a handful of gloomy fund managers are preparing for a sell-off.
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
All of the managers
featured in this story bumped up equity exposure in their portfolios earlier
in the yearthey 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.
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.
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.
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 offit 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.
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.
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.
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
SHAHREZA YUSOF, Head, U.S. Equities Aberdeen Asset Management
Aberdeen U.S. Equity fund (GXXAX) had a tough 2008the 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.
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%.
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
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.
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
a childrens 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.
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.
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.
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.
get the full skinny on the 15 gadgets, go here
and click on each of the photos on the scroll bar.
BusinessWeek subscription. Only 60 cents an issue. Click here.
travel bargains in Hawaii. Hotel
occupancy is way down. Room rates have dropped to affordable.
logic, Part 1:
logic, Part 2
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 .
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