Harry Newton's In Search of The Perfect Investment
AM EST, Thursday, December 11, 2008: I don't like present P/Es.
They're too high. And many don't take into account lower upcoming earnings.
At this point in the pullback -- the S&P is down 43% from its peak
in October last year -- P/Es should universally be in single digits. That
would make them seriously compelling.
Lots of investors -- me included -- have ants in the pants. They can't stand
the lousy yields they earn from being in cash. We yearn "to put our money
to work." We are intrigued by the "big money" some traders
are allegedly making and portrayed in shows like CNBC's "Fast Money."
"Buy and Hold" is dead and buried. The only way to make money
on the market has been to day-trade stocks and options. I personally
don't have the stomach for it. I get burned too often by the extreme volatility.
Up huge one day. Down huge the next.
If you play
the day trading game, you have to be glued to the screen, ready to pull the
trigger the moment your trade moves against you. Not 15% stop loss. I'm talking
2% to 3%. Since you're playing a game you can't control, you'd better
have nerves of steel. Even the hedge funds who played this game -- and fed
their conclusions to CNBC -- didn't get it right. It's too difficult. These
words are my way of saying, "Sorry for the itchiness and lousy returns.
Stay largely in cash a little while longer."
I remain fearful.
A reader sent me a copy of Ian McAvity's December 10's Deliberations on
world markets. He writes,
1900 there have been nine major bear markets with losses in excess of 35%
tabulated here and shown in terms of depth of loss and duration.
With the current cycle down 51.9% in 58 weeks at the recent low, it ranks
as the third worst, but third shortest. Great damage has been done
to virtually every trend, which will require time and base building to repair.
Yes, we will see wildly volatile rallies, and more steep declines. Harking
back a few issues, the DJIA has now recorded 13 days of +/- 5% change, with
9 down and 4 up since September 29th. That's second only to the 43 such
days of the 1929/32 bear that everyone hopes we can avoid replicating.
is very similar to the 1937/38 crash. It retraced half its loss in 32 weeks,
a 62% rise from its April 1938 low to November 1938 before it rolled over
and zigzagged to lower lows by 1942. I'm troubled by how many (investors)
are so anxious to buy that 1938 rally because we're so intensely oversold.
I wish I could be so sure of it, but I'm still way too nervous."
continue to be intrigued by gold.
The theory is simple. Pump endless money into the economy. You turn today's
deflation into tomorrow's soaring inflation. That will hurt the dollar. The
only safe haven is gold. That's the theory. Gold hasn't boomed. But yesterday
it went nuts, sort of. The usual suspects jumped:
GLD rose 2.8%.
The double gold
ProShares DGP rose 16.6%.
GDX, the gold
miners, rose 3.8%.
the old standby, rose 12.9%.
The theory says
everyone should have some gold. If I extended the range on the GLD you'd see
it's been a good long-term investment -- until recently.
you might get a short-term bounce out of this, given all the publicity that
gold is presently attracting.
will negotiate their agreed price. A friend rents a house in California.
Out of the blue, his landlord calls. He'll drop the rent by 30% if my friend
agrees to extend his lease for another two years. I'm trying to buy some small
items on eBay. I emailed, "Will you take $150, instead of $190?"
They replied Yes. Because he pays in cash, my father-in-law gets a 40% discount
from the local hospital.
I used to think
you couldn't bargain with brain surgeons. Years of experience shows "brain
surgeons" will do the same job for you irrespective. They're either professionals
or not. A professional has pride in his work. A non-professional doesn't.
Your job is to pick the professional and then negotiate.
really really scary predictions. Fortune
magazine spoke to "eight of the market's sharpest thinkers and what
they had to say about the future is frightening." Professor Nouriel
Roubini is the gloomiest. He says:
For the next
12 months I would stay away from risky assets. I would stay away from the
stock market. I would stay away from commodities. I would stay away from
credit, both high-yield and high-grade. I would stay in cash or cashlike
instruments such as short-term or longer-term government bonds. It's better
to stay in things with low returns rather than to lose 50% of your wealth.
You should preserve capital. It'll be hard and challenging enough. I wish
I could be more cheerful, but I was right a year ago, and I think I'll be
right this year too.
can read the other projections by clicking on Fortune's
happenings in bonds. From today's Time.com:
Say Recession, But Bonds Say Depression.
Extraordinary things are happening in bond land lately. Tuesday's head-spinning
news that Treasury bills had been auctioned off with negative interest rates
is only the latest in a series of astonishing developments, surpassing even
the more widely followed stock market swings.
Treasury auction grabbed headlines, corporate bonds are doing equally amazing
things: The average yield on lower quality investment grade corporate bonds
triple-B rated is hovering around 10%, an unusually rich 7.5
percentage point spread over Treasury bonds of similar maturity. (That spread
has tripled over the past year.) Or consider junk bonds, as measured by
Merrill Lynch's High-Yield bond index, which yield a jaw-dropping 22%. Of
course, junk bonds come from the riskiest borrowers, and a deep recession
could drive up the default rate among those companies. But current lofty
yields imply investor expectations that one fifth of these bonds will default,
according to Moody's, even though the recent default rate in this sector
has been around 3%. Notes Kirk Hartman, chief investment officer for Wells
Capital Management, a division of Wells Fargo bank: "Spreads [over
Treasuries] in the bond market are pricing in a depression scenario while
the equity markets, despite a substantial decline, are pricing in a recession."
(Read "The Recession Is Made Official [EM] and Stocks Take a Dive")
weigh on the bond market, such as the falling price of oil it closed
at $43.52 a barrel in Wednesday's trading the progress of the auto
industry bailout, not to mention every gasp from the housing market. And
then there's the elephant in the room the downward spiral of economic
activity, including last week's chilling November employment report that
showed 533,000 more people out of work "one of the worst ever,"
according to Morgan Stanley economist Ted Wieseman. As the various industry
bail outs banks, auto companies, credit unions, and next, states
seek to reassure investors, collectively they confirm just how bad
But at its
current extreme, bond investor fear is also myopic. In striving to avoid
the falling stock market and the downdraft of the economy, investors are
all but ignoring the longer-term inflationary implications of a monetary
easing and explosive growth in U.S. Government spending, and what it could
ultimately mean to bond yields. At Thursday's close, for example, the 30-year
T-bond was yielding 3.07%, implying investor expectations for stable prices
for decades to come. Inflation-protected Treasuries, known as TIPS, are
yielding so little that money managers say they imply investor expectations
for a deflationary environment for the next few years. All of which points
to the fact that nobody really cares about inflation dangers at this point;
it's all about safety.
So how should
investors approach the bifurcated bond market? Should they run for safety
of Treasuries or consider the neck-wrenching yields now available in other
sectors? Notes money manager Hartman: "From a relative value standpoint,
bonds offer an unusual investment opportunity" that he expects to pay
off once the housing market bottoms and the financial outlook improves.
"Investment grade corporate bonds are very cheap and high-yield bonds
similarly offer great value at these levels," he says. Treasury bonds
on the other hand, are widely viewed as overvalued based on what can only
be characterized as the Armageddon-anxiety rally of the past few months.
They could wallop investors with losses should the economic recovery take
hold next year.
gas drops. From reader, Ryck Wilson "Regular gas is $1.36
per gallon in Bartlesville Okla, about 50 miles north of Tulsa. Nice continuing
Hedge funds have their disadvantages.
Farallon Restrict Withdrawals as Fund Freeze Deepens
Dec. 4 (Bloomberg)
-- D.E. Shaw & Co. LP, the investment firm run by David Shaw, and Farallon
Capital Management LLC limited withdrawals by clients, joining more than
80 hedge-fund managers to impose restrictions in the past two months.
which oversees $36 billion, capped redemptions from its Composite and Oculus
funds, said two people familiar with the New York-based company. Farallon,
a $30 billion firm based in San Francisco, did the same with its biggest
fund after investors asked to get back more than 25 percent of their money.
are two of the biggest to block withdrawals, known as putting up gates,
so they arent forced to liquidate investments at distressed prices
to raise cash. New York-based Fortress Investment Group LLC said yesterday
it froze an $8 billion fund after getting redemption requests for 40 percent
of its assets. Tudor Investment Corp., the Greenwich, Connecticut, firm
run by Paul Tudor Jones, locked the $10 billion BVI Global fund last week
ahead of plans to split the fund into two.
no longer the stigma associated with putting up gates or suspending redemptions
as it was before this crisis, said Jaeson Dubrovay, head of the $19
billion hedge-fund group at consulting firm NEPC LLC in Cambridge, Massachusetts.
Its actually being encouraged by some large institutions as
a way to protect longer-term investors from those who panic and redeem.
The gate on
D.E. Shaws Oculus fund was triggered after the company received redemption
requests for more than 8 percent of assets, said the people, who asked not
to be identified because the information is private. The fund, which tries
to profit from global economic trends, is up about 10 percent this year,
compared with the average 16.4 percent decline for the industry through
October, Hedge Fund Research reported.
governor of Illinois. The governor, a Democrat, tried to sell
Barack Obama's Senate seat. He may or not have been offered as much as $500,000
in cash by one candidate. And he may or may not have offered the seat to the
arresting policeman. I will admit to not reading the long 90+ page indictment.
I picked up my "news" on the governor secondhand. Every blogger
and comedian had a field day with the governor. Apparently, the Governor still
has his fans. To them I apologize if I got it wrong.
favorite New Yorker cartoons:
Sister Mary's gas.
Sister Mary Ann, who worked for a home health agency, was out making
her rounds visiting homebound patients when she ran out of gas. As luck would
have it, an Texaco Gasoline station was just a block away.
She walked to
the station to borrow a gas can and buy some gas. The attendant told her that
the only gas can had been loaned out, but she could wait until it was returned.
Since Sister Mary Ann was on the way to see a patient, she decided not to
wait and walked back to her car. She looked for something in her car that
she could fill with gas and spotted the bedpan she was taking to the patient.
Always resourceful, Sister Mary Ann carried the bedpan to the station, filled
it with gasoline, and carried the full bedpan back to her car.
As she was pouring
the gas into her tank, two Baptists watched from across the street. One of
them turned to the other and said, 'If it starts, I'm turning Catholic.'
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
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