Entries for January 2008

Americans should get over their fear that sovereign wealth funds are calculating entities seeking to influence world events, writes Columbia Business School professor David Beim on the school's just-launched blog, Public Offering:

I find it hard to share these anxieties. To me they are just another aspect of globalization. Our largest financial institutions are no longer exclusively "ours" but have become part of the global economy. The opening of borders to flows of goods, services and investment capital brought many benefits and has internationalized most large business organizations. They have learned how to balance needs and challenges from all sides. America has long extended its investment capital into other countries, and we need to get used to other countries doing the same.

A few forward-looking gems from Bob Doll, chief investment officer over at BlackRock (for the record, BlackRock is not forecasting recession):

• From an investment perspective, fiscal and monetary stimuli obviously are supportive for equities, but it will be some time before their full effects will be felt in the markets. There are some additional important tailwinds for stocks, including increased buying activity by corporate insiders, increases in mortgage refinancing, low global bond yields and corrections in commodity prices, including oil. Over the longer-term, we remain positive on the outlook for equity markets and expect that stocks will outperform both bonds and cash over a one-year time horizon.

• Looking ahead, we remain concerned that earnings expectations for all of 2008 are too high. While expectations have come down for the first and second quarters, the consensus is still looking for earnings over 20% in the third and fourth quarters, an expectation that we believe is unlikely to be met.

• Technical factors are likely to dominate in the weeks ahead, meaning that price momentum and investor sentiment are more likely than earnings, valuations, monetary policy and fiscal stimulus to determine market direction. From a technical perspective, stocks appear to be oversold, and indicators are extreme enough to signal that a price bottom may be in place. However, major setbacks typically take the form of a "double bottom," meaning that after the first sharp recovery, prices head back down to test the low (but with less volume and intensity), a process that usually can take some time. Should that pattern remain in place, investors will be in for a continued bumpy ride.

In these uncertain times, you hear a lot of sad stories about how average Americans are afraid of losing their jobs or drowning in debt. But what about the suffering of the young and wealthy? Who's keeping an eye on them? Fear not: In its latest "Wealth in America 2008" survey, Northern Trust has found that "young millionaires are best positioned to survive market volatility." Whew! The findings do say something about how the members of generation X's upper crust are building their fortunes. They're more sophisticated investors than the baby boomers who preceded them, with bigger appetites for risk. Some 23 percent of their assets go to alternative investments like hedge funds, private equity, or real estate, compared with 14 percent for boomers and 10 percent for the so-called silent generation (ages 62-77) who preceded them. Gen X-ers are also less likely to get scared out of risky investments even with markets as volatile as they are right now because they're still working and earning enough from their day jobs to give their investments a longer horizon than their older counterparts.

The economy won't feel the full impact of this week's aggressive interest-rate cut from the Fed until this summer, says Goldman Sachs, because monetary policy operates with a six-month lag before boosting growth of the gross domestic product. According to analysts, this week's rate cut should translate into accelerated GDP growth of nearly 1 percentage point (at an annual rate). They added that the Fed's rate cuts in the second half of 2007 "should offset some of the gathering economic weakness, which is one reason we expect the recession to be mild."

In the ever expanding world of exchange-traded funds, this is shaping up to be the year of the quant ETF, according to IndexUniverse.com. Three companies are currently waiting for the SEC to green-light active ETFs, and many of the 451 ETFs and similarly structured ETNs (exchange-traded notes) in line for approval “involve some form of quantitative or alternative methodology to index construction,” writes Murray Coleman of the site. These so-called designer ETFs or intelligent ETFs attempt to beat indexes, instead of just representing them. An example is the Claymore/Zacks International Yield Hog, an exotic mix of REITs, master limited partnerships, and Canadian royalty trusts designed to generate high income.

If American markets are undergoing a gut check, across the pond stiff upper lips may be quivering as well. Britain's tiring economy has made its weariness known in the stock market. The iShares MSCI United Kingdom Fund has lost more than a quarter of its value since an October peak on woes that look strikingly similar to those in the United States: Inflation caused in part by record energy costs is hampering the Bank of England's ability to cut interest rates (though the slowing economy will very likely help the BOE set that bias by the wayside). At the same time, mortgage and credit woes exported from America are dogging the Royal Bank of Scotland, while UK lender Northern Rock—the poster child for the spread of subprime problems and the scene of bank runs this fall—continues its slump toward nationalization. Meanwhile, Citigroup notes the pound has lost 9 percent over the past six months and sits at a record low versus the euro. Its analysts say this year "is likely to be grim, with soft spending, disappointing profits, rising business failures and unemployment, falling property prices, and worsening asset quality. Most of the bad news still lies ahead." Cool, Britannia.

• Over at WallStrip, Julia replaced Lindsay.

• The Best Annual Report of 2007: The year in Nicolas Felton
• It's been around, but remember when the falling dollar was our biggest problem? Did you get your nostalgic T-shirt for that simpler time? If not, go here...

Retail stocks, which have taken a pounding so far this year, posted modest gains Friday on hopes that the tax relief package will lure shoppers back into stores. The S&P Retail index—which hit a three-year low on Tuesday—gained 0.8% on Friday, led by stocks including Nordstrom (NDS), J.C. Penney (JCP), and Kohl's (KSS).

In a note to clients Friday, UBS analyst Brian Nagel said he's turning more upbeat on the prospects of retailers. "We believe that retail stocks now discount for a potential recession in the U.S. and are poised to rebound as the market mindset shifts from 'will the economy slip into recession?' to 'who will perform in a recovery?'" Nagel upgraded Bed Bath & Beyond (BBBY) and Staples (SPLS) to "buy", sending shares up 0.7% and 1.3%, respectively. Nagel reiterated "buy" ratings on a slew of other retailers, including Best Buy (BBY), Pier 1 Imports (PIR), Nordstrom, and Under Armour (UA). He's especially optimistic about hardline retail, which includes housewares, hardware, and electronics (essentially retailers that don't deal in apparel).

Historically, the shares of retail companies have bottomed out before a recession hits—but they tend to recover before other stocks, Nagel writes. If investors wait for retailers to begin beating analyst forecasts, "they will risk missing at least the early stages of an up tick in the retail sector."

The big mutual-fund news this week is Fidelity's re-opening of the Magellan fund, which shut its doors to new investors more than a decade ago. Magellan (symbol FMAGX) today is a different animal entirely than the fund made famous by legendary investor Peter Lynch, who steered it to a jaw-dropping 29 percent annualized return between 1977 and 1990 using a "buy what you know" strategy. Lynch's immediate successors continued to outpace the stock market, but by the early part of this decade, Magellan had morphed into a near clone of the S&P 500 index. When current skipper Harry Lange took the reigns in October 2005, he repositioned Magellan as a growth fund, ditching stodgy blue chips in favor of racier fare like Google, Corning, and UnitedHealth Group. He also stashed more than a quarter of the fund in foreign stocks. The fund lagged the market in 2006, but Lange's efforts paid off in 2007 when the fund gained 19 percent, beating the S&P 500 by 13 percentage points.

Should you invest in Magellan? Although its assets are less than half than its peak in the late 1990s, the fund is still a $45 billion goliath. That's noteworthy because asset bloat can hinder a manager's ability to move in and out of holdings without affecting their prices. Morningstar, for one, is confident that Magellan can handle the new inflows: "While Magellan's size poses a challenge for a manager who has historically derived a lot of performance from smaller stocks, we still think Lange can deliver excellent returns," writes analyst Dan Lefkovitz. The fund, which requires a minimum investment of $2,500, charges a below-average 0.54 percent in annual fees.