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