Investment Update
Tuesday, July 23, 2002


The Unwise Are Buying Bonds And/Or Real Estate Trusts
     Once again, the markets have dropped a few percent. The Dow has ended the day at 7,700, the S&P 500 is 798, and the NASDAQ has been knocked down to 1,239. This is certainly a bear market of historic proportions. Meanwhile, the money that is coming out of stocks is out there somewhere, with part of it waiting to get back in. Some investors  have used it to buy bonds. You can tell, because the yield on 10-year Treasury bonds has dropped from 4.61% Last weekend to 4.43% today. That's because some of our inexperienced and unwise brethren are cashing in their stocks and buying bonds. And sadly, that means they're in for two debacles in a row, because once the stock market turns around (whenever that finally happens) and starts to skyrocket, the Federal Reserve is going to begin raising interest rates, and bond values are going to begin falling. At first, our fellow investors will rationalize it by saying, "Well, at least we're out of stocks and into something stable." But as the months roll by and they see the stocks they sold soaring, and their newly acquired bond holdings dropping just as their stock holdings did, they're may become, perchance, a trifle perturbed. 
      Or they may be putting their money in real estate. And that's also going to turn down, as interest rates begin to rise. Or they may put their money in overseas stocks. All  of these moves are most unfortunate because this is the time to sell bonds and  real estate investment trusts, and to buy U. S. stocks. The time to buy bonds and real estate investment trusts (REIT's) is when interest rates are at their peak. 

Dangerous Advice During Bear Markets
    During previous bear markets, I heeded all this advice that you're reading now about investing in REIT's, in bonds, and in foreign funds. Every time I've purchased bond funds, REIT's, and foreign stocks, I've lost money. I sold my REIT funds and my bond funds years ago. I'm still holding foreign funds. I put $200 into Acorn International in 1992. At its peak, two years ago, it got up a little above $400. Now, ten years after I bought it, it's down near $200. In the meantime, I've paid $100 in custodial fees. In 1994, when the U. S. stock market was languishing, I bought the Fidelity Pacific Basin Fund and the Fidelity Latin America Fund. I'm still waiting for them to come back up  so that I can sell them for what I paid for them. I bought the Fidelity Nordic and the Fidelity Hong Kong and China funds. They've managed to keep up with the rest of the pack. I own the Invesco European Fund. I bought in at $18 a share in 1997. It's now trading at $8 a share. I own the US Global Accolade Bonnel Growth Fund. I bought it 5 years ago at $20 a share. It's now trading at $11 a share. I own shares in the Janus Overseas Fund. It's about holding its own. The one international fund I own that has done as well as U. S. funds is Harbor International. It was closed to new investors for years, but I believe that it has reopened with the current pullback in the stock market. By now, the greater part of my overseas money is invested in Harbor International because it's a fund that has grown over the years. 
    Bear in mind that these funds were the hottest picks in the stable when I bought them.
    Fortunately, the amounts of money I've invested in global funds are relatively small. But it's deja vu all over again as I read the advice I'm reading about it being advisable to hold some foreign funds in your portfolio, and to consider investing in REIT's and in bonds. That's lousy advice at this time. . And as far as I'm concerned, the time to invest in foreign stocks is never. By now, I've read several studies that show that U. S. Stocks have consistently outperformed stocks in other countries.

Stocks and Money Market Funds: the Only Games in Town
    The bottom line is that, right now, stocks or money market funds are the only games in town... or at least, that's the way it looks to me. Furthermore, there's a great deal of money accumulating on the sidelines. The pros... that's you and me... are waiting for the market to bottom before committing their money. 

Stocks Still Aren't Historically Cheap But These Are Propitious Times
    Stocks still aren't cheap by historic standards, but on the other hand, economic conditions are uncommonly favorable for high stock evaluations. The economy is in exceedingly good shape, although the media are pouring gasoline upon a smoldering fire by suggesting that this market decline may panic consumers into another recession (like shouting "Fire!" in a crowded theater!) (This is the time when someone like Allen Greenspan and/or Paul Volcker need to step up to the plate, and say, "This is errant nonsense! Don't listen to these Stephen King wannabes! The economy is as solid as a brick wall!") P/E ratios, even if we derate them a dollar or two, are still comfortingly low for the first stage of a recovery. The P/E ratio on the S&P 500, assuming 2002 earnings of $50 a share, is slightly better than 16:1. That's not dirt-cheap, but it's a good number for this point in the economic cycle. Assuming better earnings ahead, this market is seriously oversold.

How Much Farther Will the Stock market Drop?
    "These are the times that try men's souls." How much farther will the stock market drop? I wish I knew. For anyone who's nervous about it, and who can trade without paying taxes or commissions, one possibility would be to convert a part of one's holdings to cash, and to ride out the storm that way. But it may help to know that those who are retiring to the "safety" of bonds or real estate are in for a rude awakening. I wouldn't hold anything but money market funds that I can put back into play almost immediately.
    Geraldine Weiss is looking for about 6,000 on the Dow. I don't think it will go that far down before it reverses, but of course, I don't know. It's interesting that this would bring the dividend yield to 3%. Historically, the dividend yield has fluctuated between 7% at super-bear-market bottoms to 2.6% at bull market tops. It's current value of 2.3% isn't far from the 2.7% that we would historically expect at a Dow of 8,000, even though corporations have been reducing dividends.(?)
    And I personally suspect that we'll retrace the values we're at now even if we're in a super-bear market that roller-coasters through 2014.
    Below are some articles that appeared after Tuesday's market close.

Stocks Set New 5-Year Lows on Jitters
"Many experts say the market is oversold, but investors hesitate to jump back in the market after watching their portfolios shrink day after day. From its all-time closing high in March, 2000, the broad S&P 500 Index has fallen 47.7 percent, close to the drop of more than 48 percent in the 1973-74 bear market.

"If history is any guide, sharp rallies, albeit at times brief ones, follow periods of extreme stock market volatility and decline. Such rallies include ones that took place after the 1997 Asian crisis, the 1998 Russian debt default and the LTCM hedge fund collapse, as well as the sharp advance in the wake of September 2001 panic sell off.

"The so-called "fear gauge" hit a high of over 52 on Tuesday, compared with 57 at the height of the panic selling in the autumn of 2001. Readings above 40.00 indicate extreme risk aversion among investors, and contrarian analysts look to these for a turning point in the market as investors finally enter the "capitulation" phase of selling the market lock, stock and barrel.

Getting A Handle On Falling Knives:
"It's been a brutal July. So much for the summer rally. With the Dow Jones Industrial Average down 15% since the beginning of the month and the S&P 500 at levels not seen since 1997, investors may be tempted to liquidate what they have left and leave the market. Wrong move. The editors of the top-ranked investment newsletters say that when everyone else panics and sells stock, savvy investors move in and buy.

"Geraldine Weiss, editor of Investment Quality Trends, for instance, doesn't think the worst is over by any stretch but says there are "good values." Weiss gauges whether the market is overvalued or undervalued based on dividend yield; she believes the Dow, which currently yields about 2.3%, is overvalued and will eventually yield 3%, corresponding to a level of 6,043

"I don't expect a return to 1999, when you could buy something at two or three bucks a share that goes to $100. But there are a lot of stocks that you could buy now for two or three dollars that could easily go to six or seven dollars in a short amount of time," says Buckingham, a value investor who honed his skill working with the late Al Frank.

Janet Brown, publisher and editor of NoLoad Fund*X, doesn't necessarily think investors should be bottom fishing but, rather, believes that smart investors should preserve capital and move into funds that are outperforming on a relative basis (losing less). That means focusing on small- and mid-cap value funds as well as international funds. Sean McKeon at Fund*X says some good international funds are Harbor International ( HAINX) , Oakmark International ( OAKIX) and Matthews Asian Growth & Income ( MACSX)

"But Navellier points out that investors should be realistic about the prospects for the companies that they buy. He says accumulating shares at these levels will pay off for investors but perhaps not right away. 'When buyers come back, they won't be storming in. They'll be tiptoeing.'"

Stocks Broadly Lower on Earnings Jitters
Nasdaq mauled as techs plunge; Dow hurt by financials
Stocks Sink Further Into the Red as Citigroup, J.P. Morgan Pressure Dow Industrials
Stocks fall in volatile session; tech and financials hardest hit
Dow Falls For Fourth Day of Losses
Small Consolation
Stocks Stick to Losing Ways