Keith Fitz-Gerald's THE SKEPTICAL INVESTOR
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $199.
Bubble-Beating Strategies
Keith Fitz-Gerald: "I believe this housing bubble is so important that I'd like to take a moment to walk through a few steps you can take to avoid getting caught in the coming explosion. Most Americans fail to understand that their homes are the single biggest investment they will make in their lifetimes. For some strange reason, they view them separately from stocks. That's a dangerous mistake since it tends to artificially diminish the perception of risk. Here are some guidelines to help you protect yourself:
If you are buying a home to live in, use only fixed-rate mortgages. Whatever you do, avoid the adjustable rate mortgages (ARMs) or interest-only loans that are so popular right now. No matter how badly you want a particular property, don't do it. Not only are you potentially stretching yourself beyond your financial capabilities, but you're setting yourself up to owe more in the future as interest rates rise. You could even owe more on your home than it's worth, which is a situation you never want to be in.
If you currently have an adjustable rate mortgage, now is the time to convert it to a fixed loan before rates get much higher. Do not delay. Every day you do, you risk losing your bacon - or at least having it cost a whole lot more than you bargained for!
If you are thinking about buying investment property, think twice. Buying investment property, particularly when it is not your primary avocation, is pure speculation. There is no such thing as a "can't lose" real estate deal - especially after the crazy run we've experienced.
If you have a home equity loan or line of credit, now is the time to pay it down. You don't need to close them out completely, but get rid of the debt. Not only will this debt cost more with higher interest rates, but if you have to sell your house, the bank will take what it's due before you ever touch that money.
If you are selling a home, don't settle for anything else other than cash. Don't trade. Don't accept promissory notes. And absolutely don't take an IOU from some "no money down" vulture. The last thing you want to do is take on the risk of a property decline for some overextended deadbeat who can't pay.
Keep Your Investments Safe
In terms of investing, I want you to make sure that you're up to speed on the Safety & Balance portion of your portfolio. These investments will help you not only survive the real estate bubble bursting, but will make you money when just about everyone else is losing theirs. Remember, falling real estate prices will have serious consequences for the market and many stocks, so these investments are extremely important right now. That's a big reason I recommend that you put up to 50% of your portfolio in these investments.
The most important of these is the Treasury bill-only money market fund. If your broker offers one of these, make sure you're in it. If not, put your money in the American Century Capital Preservation Fund (CPFXX), which invests only T-bills.
Lots of investors use money market funds to stash their cash. Yet, few understand how truly significant such a seemingly innocuous choice really is. Putting money into a money market fund is actually one of the most important decisions you can make. It has a potentially monumental effect on your financial future.
Here's why: Most folks think of money market funds as interest-bearing investments that are a temporary proxy or holding tank for their assets...while they hunt for other opportunities. That can be true, but it misses the point and is certainly only part of the picture. What most investors don't understand is that there are as many types of money market funds as there are flavors of ice cream, and it's important that you pick the right one.
My personal brokerage is Charles Schwab. Like other firms, they offer a variety of money market funds including those that hold cash, government bonds, high-yield corporate bonds, regular corporate debt, municipals, and so on. Some have higher payoffs - like the high-yield corporate money market funds - and some are lower, like munis. Well, heck, just put your money in the highest-yielding investments, rights? Wrong. That's what most people do, but they're actually putting their money at risk when they believe they're getting safety.
The term "high-yield corporate bond" is a more palatable version "junk bond." The bonds owned in a high-yield corporate money market fund are typically issued by "junk" companies that you wouldn't own in a million years because they are in such dire financial straits. When you buy these junk bonds, you're loaning money to a company that could well go bankrupt. Who wants to do that? That's as bad as buying most growth stocks and hoping someone else will buy them from you at a higher price down the road.
Money market funds should not be speculative vehicles. They should be safe havens that also give you a return on your money. That's why I specify Treasury bill-only money market funds. T-bills are the safest securities in the world. They also mature in 90 days, which means that your money is continually rolled into higher-yielding T-bills. Think about this: As Greenspan continues to hike rates, the yield you are obtaining goes up in lockstep - and here's the important part - with no change in the underlying risk. That's why these are the most important investments right now, so please be sure you're in the right money market fund."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Ride this rally with convertibles
Richard Lehmann: "No sooner did we pass the mid-year with all the major stock indexes in loss territory, but stocks began to rally. Now, one month later, all major indexes are setting multi-year records and talk about a bull market is more than just a whisper. Considering how well convertibles did in the first half (up 7.70%) when the stock market did nothing, think of what it may do if this bull market continues.
Additionally, when I asked recently at an investment seminar when I thought interest rates would rise, my answer was, when the stock market takes off. This notion that rising stocks will cause rising interest rates is based on the simplistic notion that money follows the action. The easiest money to feed a stock rally will come from the fixed income markets. The harder money will come out of the speculative real estate market. Hence, goods news on the stock front means bad news for interest rates and housing prices, or so it seems if your from that school that thinks that an economy is not made up of mutually exclusive events.
While this theory of money flows is not supported by history, keep in mind the last bull market started in the early 1980's. The composition of market participants and the fungibility of investments since then allows one to speculate that a hot stock market will pull funds out of these other areas, not just grow by slow accretion. The growth of hedge funds and their market importance is just one example which reinforces this theory.
Since most fixed income investors over 55 have gone through one or more stock markets disappointments, a bull stock market is no longer a place for big bets. Convertible preferreds allow you to pursue a fixed income strategy while picking up some of the stock upside and a lot of protection against the interest rate rise it may trigger. As a result, this month I am adding two closed end convertible funds to our recommended list; the Advent Claymore Convertible Securities & Income Fund (AVK) and the Nicholas-Appelgate Convertible & Income Fund II (NCZ). Why these funds rather than a selection of individual convertible preferreds? These funds provide a much broader selection of both convertible bonds and preferreds than are available to most investors. Convertible bonds are hard to buy in small quantities and most convertible preferreds these days are mandatory preferreds which leave little room for error. Yes, they add a management fee component, but they more than pay for this through the use of leverage."
Standard & Poor's THE OUTLOOK
55 Water St., New York, NY 10041.
1 year, 48 issues, $298.
Focus of attention on 2006
Joseph Lisanti: "Earnings continue to be strong, and the Fed may be almost finished tightening. We think that combination is a plus for stocks.
Inflation is contained, and corporate earnings are strong. That's usually good for stocks, as recent market action has confirmed. But where do we go from here?
By its nature, the stock market is a forward-looking beast. Although we are just a month beyond the halfway mark in 2005, the focus of attention is already moving to 2006.
On the profit front, we expect companies in the S&P 500 to continue to do well. Our forecast for 2006 operating earnings on the index is 83.40, another record, and 10% above the 75.68 we now see for 2005.
Standard & Poor's has tracked operating earnings on the "500" since 1988. As a result, we have data on annual percentage changes in operating earnings for 16 years, from 1989 through 2004. The average annual gain for that period has been 8%. So even though we are not likely to see the 24% rise in operating earnings that we had in 2004, our projection is for a better-than-average advance next year.
Our forecast is that the S&P 500 will end this year at 1270, and we project 1335 at yearend 2006."
The Lou Dobbs MONEY LETTER
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $195.
Repositioning for a
bullish second-half outlook
Lou Dobbs recently interviewed Sam Stovall, Standard & Poor's chief investment strategist, and asked him to share his insights and stock selections. Stovall is quite bullish on the rest of the year and wants to make sure his recommendations take full advantage of his outlook.
Lou Dobbs: Sam, welcome back. Before we get to your specific changes, let's talk about the economy and the market. We've passed the year's halfway point, so what's your take on the rest of 2005?
Sam Stovall: We just recently made a substantial change to our recommended sector weightings, as a result of a lot of difficult economic and market factors. These factors include: resilience in the market after the London bombings, rising consumer confidence and spending despite record high oil prices, fewer-than-expected second-quarter negative earnings pre-announcements, a tamer-than-anticipated inflation picture, a favorable employment growth backdrop and a projected nearing to the end of the Fed's rate-tightening program. My belief is that investors are going to give up their defensive stance, and they're going to start to lean more towards growth-oriented sectors of the market. Also, there is more than $630 billion of cash on the books of the companies in the S&P. There's worldwide liquidity, and I feel that people are going to want to put this money to work.
As for the economy, our projections are 3.6% growth this year and more than 3% next year. We're looking at economic growth that is still at or above the Fed's target rate of 3%; we've got unemployment near 5%, which is almost like zero unemployment; and we've got an average of 180,000 new jobs created every month. That's going to lead to increased spending just because more people are working. With good economic growth, but not too much, the Fed will soon have to stop raising rates, and when they do I think the market will like it.
Dobbs: I've got to ask you about the housing market, because everyone's looking at it.
Stovall: You're looking at a low interest rate environment, and strong economic and employment growth. Plus, when you're looking at P/Es that are below 8 for some of these companies, it's pretty hard to get bearish on them. I'm definitely a student of history, and I remember that from 1988-1996, the median price of a co-op in Manhattan fell 45%. I've been on the wrong side of a weak housing market, and it's not fun. I know that things like this happen, but I tend to think that housing prices might slow.
Dobbs: What about oil and gas prices?
Stovall: Our forecast is that oil is going to be about $56 a barrel at the end of this year. That number is higher than it was at the beginning of this year, and it's higher than it was about midyear. From a fundamental standpoint, we think oil should be trading in the mid- to low- $50 per barrel range, because that's the kind of economic growth and resulting demand that we anticipate. But when you include hedge fund trading and worries about supply disruptions, that puts a premium on it. Yet there's still good economic growth out there and, as a result, we see no reason why oil prices would fall precipitously.
Dobbs: Given your rosy outlook, what sectors are you looking at and which ones are you avoiding?
Stovall: We have overweight recommendations in the information technology and consumer discretionary sectors. We have underweight recommendations in industrials and materials, and we're neutral on basically everything else.
Favored stocks include: In the information technology sector, Automatic Processing (ADP). In financials, I still like Citigroup (C). To bolster financial, we'll also add National City (NCC), one of the country's 10 largest banks. I'm staying with just one company in energy, ExxonMobil (XOM). For healthcare, let's keep St. Jude Medical (STJ). In consumer discretionary, we like Finish Line (FINL). In this same category we also like Four Seasons Hotel (FS). In materials, I recommend Manitowoc (MTW). And with consumers staples, let's add Spectrum Brands (SPC) and I'll also add International Rectifier (IRF), a maker of semiconductor chips, in here."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
Short-term
Indicators turned bearish
As of August 24th Irwin Yamamoto's short-term stock market indicators have turned bearish.
"We suspect the change will be a temporary one, perhaps a couple of months or so. However, it depends on the fundamental and technical underpinnings.
The switch from the bullish stance to a bearish mode is due to the near-term overbought condition. In addition, our sentiment indicators have turned bearish as too many strategists are positive on the market. And the fundamentals, rising interest rates, don't look favorable.
Despite the shift, we will stick with our portfolio, 30 percent in equities and 70 percent in bank money market accounts."
EQUITY FUND OUTLOOK
P.O. Box 76, Boston, MA 02117.
Monthly, 1 year, $149.
Thurman Smith: "Stay fully invested, but don't chase the hottest specialty funds, be they sector funds or foreign stock funds. It's generally better to find fund managers who are consistently good at investing in the sectors with the strongest prospects, Such an approach would likely fare better with less shifting around, than trying to incorporate hot sector fund or chasing foreign funds with recent strong performance, often mostly from currency changes. It's harder to go awry concentrating on flexible, diversified domestic stock funds with evident management skill, and to assemble the most attractive funds available in a portfolio that will work for one's risk ceiling and is as balanced as possible. Many funds that end up with high ratings do include some foreign issues, as well as overweight sectors that are currently strong."
Thomas Henning: "The Bond Market has cracked to the downside most probably starting a cyclic bear market with a killer rise in interest rates which will implode the debt bubble. A close below 113 basis the spot month would bust the Weekly Hard Momentum to the downside. Given that breakdown, "All ye who enter abandon all hope."
The Gold Complex is acting like a champ. To confirm the start of the juicy #3 wave, closes above gold 460, XAU 114, would put the complex into the wild blue yonder.
At the risk of being a party pooper, I still can't rule out one more downleg to fulfill a potential wave count, but busts above the aforementioned levels would rule out that potential downleg.
The Stock Market has been leaking oil as internals are beginning to fail after the recent upleg that started last May.
Near term, closes below Dow 10,520, confirmed by the Transports below 3720 would suggest the beginning of a downside move to test the April lows of Dow 10,000, Transports, 3348. A bust of those lows would confirm the start of the anticipated implosion.
Recently, the housing stocks have broken down. This is the "Kiss of Death." Anyone for a housing bubble burst?"
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