Insights & Advice


Is it time for the bears to hibernate?

For most of the nation and certainly here in the Berkshires, we are up to our knees in the white stuff and bears are supposed to hibernate in the winter. Hopefully, the same will be true in the stock market.

So far so good for the first week of 2010 but no, I’m not going to extrapolate one week’s gains and predict the year will be straight up, especially right now when we are just ten points away from my 1,150 target for the S&P 500. Around that level, I’ve been expecting a pullback. Any pullback, no matter how minor, is painful. That doesn’t mean you should bail out of the market. I suspect the downside (if it occurs) won’t be anything more than another buy-on-the-dips correction like we experienced several times last year.

In my New Year’s column, I wrote that the markets will continue to move higher over the next few months but not at the torrid pace we enjoyed last year. I also think that the bulls are far more discriminating than they were in 2008 when everything was down 36% to 50%. It is what I call a stock picker’s market.
Unfortunately, most investors (and financial advisers/brokers) don’t have a clue how to play that game. Retail investors tend to chase the hot stocks and sectors only to be left holding the bag as the insiders move on to the next target.

The advice from most financial professionals is even worse. Decked out in thousand dollar, three piece suits, they usher you into their conference rooms of polished mahogany. Solemnly, they advise you to buy a “market portfolio” with an allocation of bonds that most often depends on your age, risk tolerance or some other mumbo jumbo that pretty much guarantees mediocrity in a market like this.

So what do you do? For starters, be a lot more careful in where you commit new money. I’ve noticed some players cashing in on some of their big winners of last year and putting some of that cash in laggards. Laggards are those stocks and sectors which have not done as well as the market. I’ve learned, in talking to several of the most successful mutual fund managers, like Don Yacktman (Yacktman Funds) and Bruce Berkowitz (the Fairholme Fund) that both have large holdings in health care stocks going into 2010. This is a sector that has underperformed the market thanks to the cloud of uncertainty generated by pending health care legislation. You might want to pay attention to what these value fund managers are buying.

If you are heavy in bonds—hedge. The bears won’t be hibernating in this area in 2010. For some readers, selling your bond holdings is not an option.

“I live on the income,” explained one reader who called from Cairo, N.Y, “and I personally find it a more comfortable place to be than stocks.”

Consider protecting (hedging) your investments, especially in U.S. Treasury bonds. I’ve written at length on inverse securities, especially exchange traded funds, which investors can purchase to protect your investments from market declines. It would be a prudent thing to do in the bond market, in my opinion, to develop a defensive strategy before interest rates begin to rise.

Rising interest rates, given today’s historically low levels, is not a question of “if” but simply “when” rates begin to rise. As rates rise, bond prices decline and bond holders suffer. If you need help in devising a strategy to protect yourself in a rising rate environment, you know how to contact me. Otherwise, take some action now.

Over in the commodity corner, oil is fast approaching my $90/BBL. target, thanks to timber- shivering weather around the country. But gold and silver continue to zig as the dollar zags. I advised taking some profits in precious metals above 1,200/ounce in gold (and $19.89/ounce in silver). I don’t think the correction in that market is quite over, despite the recent bounce. Normally, gold and silver will spend several months in a trading range before moving higher again. My target, once the bull run resumes, is north of $1,300/ounce for gold.

Agricultural commodities, stocks and ETFs however, are a place I feel comfortable accumulating on any dips. The supply and demand picture for food hasn’t changed just because we experienced a financial crisis last year. People have to eat and today there are a lot more people worldwide who can afford three squares a day. That’s going to mean that demand for agricultural products will continue to rise as will the price of just about anything food-related. So eat up and profit.

Posted in At the Market, The Retired Advisor