PINNACLE
Greystone Court W., 573 Hopmeadow St., Simsbury, CT 06070.
Published for clients of Pinnacle Investment Management Inc.
www.Pinnacle-Investment.com.
Wise for investors to be cautious
John Eckel: "In the face of potentially aggressive Federal Reserve rate hikes it is wise for investors to be cautious. Appropriate steps to take may include increasing the level of cash, increasing investments in defensive stocks, "value" mutual funds, and stocks that benefit from rising inflation. Energy, basic materials, commodities and natural resource stocks such as Caterpillar, Nucor, Phelps Dodge, Sunoco, Amerada Hess, and mutual funds such as RS Natural Resources and Pimco Commodity Real Return should benefit from rising inflation.
Additional steps that could be used to reduce risk include utilization of "market neutral" or "long-short" strategies which may buy some stocks, while selling "short" less attractive stocks or stock indexes (selling stocks you do not own in the hope of buying them back more cheaply in the future). Funds such as Hussman Strategic Growth, Caldwell and Orkin Market Opportunity, and Leuthold Core employ these strategies. The use of "bear market" funds, such as Leuthold Grizzly Short, which sell short stocks that are unattractive, is an additional option that may be best utilized by more aggressive or experienced investors.
Bond investments should also be made cautiously since rising rates will result in declining bond prices. FPA New Income and Pimco Total Return, which are taking a very cautious approach in anticipation of rising rates, offer a good opportunity to invest in a diversified portfolio of bonds. Bond funds which have an allocation to foreign bonds include American World Bond, and Pimco Foreign Bond and should benefit if the US dollar continues to decline. Eaton Vance Floating Rate fund and other funds which invest in floating rate loans should provide positive returns in a rising rate environment.
Foreign stocks still remain slightly undervalued compared to US stocks and international value funds such as First Eagle Sogen Global and Overseas, Longleaf International, Tweedy Browne Global, Third Avenue International Value and Franklin Mutual Discovery should perform well with limited volatility and may benefit from a falling dollar.
Small cap stocks are no longer undervalued compared to large cap stocks and at first glance it may look like it is no longer advantageous to over-weight them. However, research by The Leuthold Group suggests that during periods of increasing inflation small cap stocks outperform stocks of larger companies. Third Avenue Value and Keeley Small Cap Value are good choices.
Merger, and Calamos Market Neutral fund provide a good vehicle to invest in alternative investments that follow relatively low risk strategies and have little correlation to the stock and bond markets, while Gateway sells call options to generate additional income and buys put options to protect against losses."
Consumer Reports MONEY ADVISER
101 Truman Ave., Yonkers, NY 10703.
Monthly, 1 year, $24.
10 winning foreign-stock
mutual funds to consider now
Marlys Harris: "You probably know that for the past couple of years, foreign currencies like the yen and the euro have trounced the dollar. What you may not have noticed is that the major index for foreign stocks - Morgan Stanley Capital International Europe, Australasia, and Far East Index (EAFE for short) has been outperforming the Standard & Poor's 500 stock index for the past year.
Meantime, foreign-stock mutual funds have been going strong for several years. If you've missed out, you're not alone.
Many investors have hesitated to put their dollars in international stocks because they seem to risky or exotic. But the May issue of Consumer Reports Money Adviser (CRMA) identified the top ten most reliable foreign-stocks that have been long-term performers - outperforming a majority of domestic stock funds: (1) First Eagle Overseas A (SGOVX) 800-334-2143, Load-adjusted annualized returns, 10 year 14.0, 5 year 15.4; (2) American Funds Capital World Growth and Income A (CWGIX) 800-421-4120, 10 yr 13.7, 5 yr 7.0; (3) Tweedy Browne Global Value (TBGVX) 800-432-4789, 10 yr 12.4, 5 yr 7.1; (4) Templeton Growth A (TEPLX) 800-342-5236, 10 yr 11.2, 5 yr 6.3; (5) MFS Global Equity A (MWEFX) 800-225-2606, 10 yr 9.5, 5 yr 0.9; (6) UMB Scout Worldwide (UMBWX) 800-996-2862, 10 yr 10.4, 5 yr 1.6; (7) Fidelity Diversified International (FDIVX) 800-343-3548, 10 yr 13.0, 5 yr 4.1; (8) American Funds New Perspective A (ANWPX) 800-421-4120, 10 yr 11.9, 5 yr 1.0; (9) American Beacon Intl. Equity Plan-Ahead (AAIPX) 800-388-3344, 10 yr 10.1, 5 yr 4.0; (10) Templeton Foreign Smaller Companies A (FINEX) 800-342-5236, 10 yr 9.1, 5 yr 7.6."
THE NO-LOAD FUND INVESTOR
P.O. Box 3029, Brentwood, TN 37024.
Monthly, 1 year, $139.
Sheldon Jacobs: "Our overall outlook for 2005 remains the same: a stock market with a downward bias, albeit punctuated with intermittent rallies. Gains from superior, low-risk stock funds are possible. We also expect rising short-term interest rates and moderately higher long-term interest rates; there will be an emphasis on quality both in the equity and fixed-income markets."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Hedge Funds:
The Next Big Scandal
Charles Allmon: "You can see this one coming. When the yelling by hedge fund operators continues unabated, you know someone hit a raw nerve in this highly secretive industry. Now pushing a trillion dollars in total assets, hedge funds are accountable to no one. Perhaps we'll wake up one morning to discover that several big-time Ponzi schemes have been operating for years through clever manipulation of hedge fund assets. Who is to know? Serious complaints about some hedge fund operators already are trickling into the S.E.C., triggering an acute need to pull this huge pool of assets under a firm regulatory umbrella. All hell could break loose after the next big market smash.
One hedgie is suing the S.E.C. to head off registration. Maybe someone should get a court order immediately to audit his fund. The founder of another budget fund reportedly told an investor, who wanted his money out, that "the money was stolen." Well! As much as $90 million may have disappeared.
Can you think of a better place for dirty money to find a home than in a hedge fund? I cannot. Foreign hedge funds may be the ultimate haven for hot money. Over the past couple of years, news items report that drug traffickers pour big bucks into hedge funds, along with terrorist organizations. Obviously, no regulatory oversight implies that anything goes. It took a huge market washout to uncover sleazy operators at Enron, WorldCom, etc. Who is next?"
MUTUAL FUND MONITOR
1412 Spruce St., Berkeley, CA 94709.
Monthly, 1 year, $79.
Larry Luce: "Market valuations remain unchanged. Fund managers are not finding many bargains. I have not changed the model portfolio allocations, heavily weighted in hybrids.
Clipper Fund manager James Gipson noted the following:
"Breaking with central banker tradition of speaking in obscure terms that intimidate the listener rather than illuminate the subject, Alan Greenspan was crystal clear, 'Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money."
Gary Shilling thinks the effect on stocks has been delayed by disbelief that the rise in short-term rates will continue. As they continue to rise, he expects a selloff of financial stocks at some point.
When Greenspan speaks clearly, we are in unusual times. Caution is the word.
Shilling also has a comment on the higher oil prices. Most feared runaway inflation. Instead, the high prices are acting as a tax, clipping a percentage point off gross domestic product growth.
He thinks that inflation remains low because we are in a "deflating world of excess men and machines."
THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $129.95.
Dr. Robert Valuk: "We all know April showers bring May flowers, but May flowers soon lead to the summer doldrums. Why are markets so depressed from May to October? Well everyone is on the beach, or traveling. The Hamptons, Cape Cod, and the Jersey Shore harbor more traders than Wall Street - and quite frankly money flow often dries up. Of course if we sell everything, that old market will rally in the summer and defy the logic of the sages and ages. In reality, the summer is almost always bad for stocks, but there have been expectations. May is a good time to review your portfolio and identify any holdings that could drop a lot if the market develops its usual funk. Candidates include mutual funds and your current "sacred cows" otherwise known as your oil holdings. If we sell in May and go away, we can put the money in bond funds or closed-end mutual funds (Cohen & Steers Quality Income Reality-RQI, Templeton Emerging Markets-TEI, and Cohen & Steers REIT and Utility Income-RTU for example) and repurchase securities and aggressive funds in mid to late October. Low commissions and no-load funds would be critical to making this exit strategy work for you. The author prefers to maintain his portfolios (high income selections and stocks), but writes options (sells covered calls) on his stocks over the summer months. The author does sell off all high - PE growth issues that do not offer covered calls and/or have dividends over 2.5%. Funds that can be held are indicated in our Fidelity and Vanguard portfolios."
MONEYLETTER.com
360 Woodland St., P.O. Box 6020, Holliston, MA 01746.
1 year 24 issues, $150.
Best gains will be found abroad
Walter Frank: "looking at the domestic market, we expect to see reasonable growth here over the course of the year. We are seeing some slowing this quarter, but, all in all, there is nothing to suggest the economy is stalling.
The earnings estimates for the next twelve months tell us that the market is selling at less than 16 times those estimates. That may overstate the case, since oil is inflating the earnings estimates. Still, stock prices look reasonable, considering our outlook for interest rates.
However, the gains here in the U.S. will generally be in single-digit land. The best gains will be found abroad, and once again in developing - not developed - economies. The one exception to that could be Japan. Growth is proceeding abroad in China and India as it has. That is why we believe that emerging market slide is temporary. The low relative valuations of stocks in the emerging markets countries are somewhat lower now. It will take time but investors will return.
It seems ages ago, but only a mere three weeks ago six of our 10 portfolios were able to report gains for the first quarter (albeit small), while the four losing portfolios had losses that were all within the one percent range. The first quarter had given us a bumpy ride, but when the quarter ended, all the portfolios turned in performances better than that of the Vanguard 500 (-2.2%) and the broadest index of the market, favored by Mark Hulbert, the Wilshire 5000 (-2.4%). The differences in performance vis-à-vis the averages were relatively small, but then again, we are only talking about a three-month period.
The distinguishing feature of the first quarter was the outperformance by the natural resources funds (think mainly oil and gas) followed by some distance by some overseas categories, international small cap and emerging-type markets. We had representation in the latter categories.
Before we get deeper into performance, we want to point out another distinguishing feature of last quarter, and that is the roller-coaster nature of the market over the first three months. It is hard to realize now, but in early March the S&P 500 hit a high for the year. Despite the Fed raising rates, despite oil prices, stock prices were moving up. But early March was it. From then on, the market took an oil-slicked ride down, turning the quarter from positive to negative for the averages. Like March, proverbially, the first quarter started off like a lion and ended like a shorn lamb.
We believe that international funds should have a larger allocation for U.S. investors than is normally the case. And while the U.S. still ranks in the growth league table, pride of place belongs to Asia.
When it comes to performance over the quarter, a trio of funds, Fidelity International Small Cap, Artisan Mid Cap Value and Fidelity Leveraged Company, all quite different from one another, turned in performances in the 5% range, while the overall market was losing more than 2%. We cannot find a common thread that runs through all three funds. One, International Small Cap, was in the right place at the right time, but it held its own against its peers. (According to Lipper, the average international small cap fund was up 3.3%). As for the other two funds, they had no help from their sector.
As we step back and look at last quarter, it was, more or less, in line with what we had been expecting for the year. We had bad luck, in the form of a severe winter here and in Europe that helped drive oil prices beyond anyone's expectations. Those oil prices helped choke off growth in the last weeks of the quarter. With all that we did see growth over the three months, and we believe we will see moderate growth over the rest of the year."
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