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Last weekend, I attended the Money Show in Washington, DC. The themes of fear and greed ran throughout the show. And I’d say that fear had the upper hand.
The speakers at the show (I was one of them) presented a bushel of picks for both up and down markets. And it’s always good to get a peek inside some of the best brains in the business.
I’ll share some of those picks with you in just a bit. But first,
Here Are My First Impressions
From the Money Show …
Depressed investors stayed home. It was my first time at the DC Money Show. There were plenty of interesting seminars — too many to fit into my tight schedule — but it was a lot less busy than other Money Shows I’ve been to. And more than one attendee told me it was smaller than last year. I didn’t have a problem finding a seat in any of the seminars I attended — I can’t say that for the shows I’ve attended in Orlando and Las Vegas.
Depressed companies stay home, too. The exhibit hall was small compared to other shows I’ve been to. There were plenty of money managers, coin dealers and publishers. But it seemed to me that small, start-ups and explorers were under-represented. Maybe this was evidence of the credit crunch squeezing the small guys.
Fear trumps greed. Everyone I talked to had horror stories. Nobody was bragging about 5-baggers on this or that stock. Even the bears were making up for lost money.
Here Are Some of the Experts
From the 2 Camps I Listened to,
Their Outlooks and Recommendations …
Camp Greed …
The eminently quotable Jim Lowell of Fidelity Investments (and editor of the Forbes ETF Advisor) expressed a mix of short-term apprehension and longer-term bullishness. He considered himself a long-term investor. But added that “long-term investing doesn’t mean standing still when you know you’re in the middle of a railroad track.”
Mr. Lowell said his goal is to “lose measurably less in downtrends.”
In the second week of August the world changed, Lowell said. Through July, the Fed, Treasury and other central banks were looking to fight inflation. But inside of four weeks in August, the Fed went from inflation fighting to panic attacks.
“We went in an 8-day time period from an investing banking system that was the envy of the world to no investment banking system left.”
The good news, if there is any, Mr. Lowell said, is that central banks now share a vision that the whole global financial system is in peril, and they’re willing to do something about it.
Still, there are surprises — both good and bad. “You can’t go for more than a 7-day period without something new and radical coming into play,” Mr. Lowell said. “I do not expect volatility to dissipate in the next 9 months.”
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That said, Mr. Lowell remains optimistic longer-term. “In the next 18 months, I’m not looking for a dramatic turnaround in the global economy, but I am looking for a turnaround in the global markets.
“Now is a wonderful time to upgrade the quality of the holdings and fund managers in your portfolios.”
As for picks, he likes alternative energy and infrastructure (two themes I heard repeatedly throughout the conference), as well as materials and biotech. Mr. Lowell also likes the PowerShares Dynamic Retail ETF (symbol PMR) because there is talk of Washington sending out another stimulus check to taxpayers. And he likes the PowerShares CleanTech ETF (PZD).
John Najarian of OptionMonster.com is on CNBC’s Fast Money. He explained some options strategies that have proven to be winners in a wild market. He also explained how computers have sped up global trading to the point where one computer made a mistake and lost $94 million in less than a second.
Mr. Najarian said that volatility has been so high recently that it’s very likely to come down. Therefore, selling volatility (i.e., selling options against stock in your portfolio) might be the best trade in the near term.
Kenneth Leon is a senior director of Standard & Poor’s U.S. Equity Research. He spent a lot of time talking about a new S&P research product for Exchange-Traded Funds (ETFs). However it won’t cover ProShares funds, which are the “ultra” and “ultra-inverse” funds that have spiced up ETF trading.
October saw money flow out of mutual funds and into ETFs. And Mr. Leon likes ETFs for all the reasons I do …
- Low transaction fees
- Plenty of liquidity (volume)
- You can trade them intraday
- Tax efficiency
- Focus on different investment styles — they’re especially good for sector rotation
- Transparency in underlying holdings
He mentioned that there are 707 ETFs in the U.S. (and over 1,100 world-wide) with $585 billion in assets. He expects ETF assets to reach $1 trillion in 2009 and more than $2 trillion in 2010. And Barclay’s iShares and State Street’s SPDRs are 65% to 70% of the ETF market.
Mr. Leon thinks that S&P’s credit ratings of stocks and funds are important. But after what we’ve seen in the past six months — with one highly-rated firm after another hurtling into oblivion — S&P ratings don’t matter much to me.
Jim Jubak, from MSN.com, was in DC to make the case for investing in electric utilities. He said investors should follow the lead of Warren Buffett, who scooped up Constellation Energy Group for $4.6 billion, just one of a slew of deals he’s made in the sector.
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| Warren Buffett is jumping into utilities because they generate tons of cash. |
According to Mr. Jubak: “Because utilities, even financially stressed utilities like Constellation Energy, generate so much cash, Buffett can buy these shares without worrying too much about when the bear market will finally end.”
Also, utility companies that can raise cash will have almost unlimited places to invest it as America rebuilds its aging electric grid and moves into alternative energy. And those investments will have rates of return guaranteed by state utility regulators.
The two utilities that Mr. Jubak likes most for the long-term are FPL Group (FPL), the Florida-based utility with a mixture of conventional, wind and nuclear power, and Edison International (EIX).
Jubak added that it may be “six to nine months early” to buy these two stocks now. He also likes power grid hardware and component manufacturers and natural gas pipeline companies with big fat yields.
When the market is going to heck in a handcart, more people get bullish on bonds. Timothy Middleton, head of MSN’s ETF Insider made the point that the bond market had been “totally throttled” and said there were bargains galore in select corporate bonds. He recommended the website investinginbonds.com for investors new to the bond game.
He liked the Goldman Sachs Investment Grade Bond Fund ETF (symbol LQD) and the iShares Lehman MBS fixed-rate bond fund ETF (symbol MBB).
Camp Fear — Dow 4,000
I attended a panel hosted by the folks from ChangeWave. And they seemed determined to scare the bejeezus out of me. Their consumer surveys, they said, revealed that consumer sentiment was getting much worse, not better. And higher-end retailers were in for a world of hurt. On the plus side, bargain-bin kingpin Wal-Mart could pick up the pieces.
And with the M&A business on idle and banks refusing to make loans … where had the banks’ business model gone? Into a ditch, according to ChangeWave. Despite the fact that banks are way off their highs, there are some big banks that could go a lot lower. The ProShares UltraShort Financials (symbol SKF) was recommended as a way to play further carnage in the banking sector.
Some of the speakers I found most interesting were from MSN Money. Jim Markman, who writes the “Supermodels” column on Thursdays, pointed out that the market used to favor small-cap stocks but now prefers large-cap stocks.
There’s a simple reason for that — with large-cap stocks trading at huge discounts to their prices just months ago, “you don’t need to take on the risk of a small-cap stock if you can buy a large-cap stock at a low price-to-value.”
Mr. Markman also noted that 2008 was the second-worst year for the market in 183 years, second only to 1931 (to see a chart on those returns, click here).
What’s significant about 1931, two years AFTER the crash of ’29?
Mr. Markman recounted that 1929 was the year the “dumb money”, as Wall Street likes to call ordinary investors, lost their shirts. 1930 was the year the smart money lost their shirts. And 1931 was the year the really smart money lost their shirts.
So when you see hedge funds and well-respected investors doing badly this year, some might see that as a sign the carnage is almost over, and that next year will be better. Mr. Markman says he’s open to the “possibility” that the markets will improve in 2009.
That said, he also has put a potential target on the Dow Jones Industrial Average at 4,000 — a level it last hit in 1995, before debt started to play such a large role in corporate and personal finance. He’s also not looking for a real economic recovery until 2012, if then.
Later, the three MSN columnists — Markman, Middleton and Jubak— exchanged views on a panel.
Mr. Markman expanded on his bearish views — explaining that the credit market is trading as if the S&P 500 is at 800 (it closed Monday at 919, implying a haircut of another 13%).
He also said the worst news is not behind us, raising the specter of hundreds of trillions of dollars in currency swaps and interest rate swaps blowing up in companies’ faces.
Mr. Middleton joked, “I used to write for Field & Stream, and I’m glad I did because I can shoot myself.” He expressed fears that the world is moving from a cyclical bear market to a secular bear market.
Mr. Jubak said, “If you keep your head stuck in the U.S. markets, things look worse for a lot longer than they do around the world. Wal-Mart, McDonald’s and DuPont were the only growth stocks in the Dow.” But he said he’s still looking at positive growth in the rest of the world.
He added that government bailouts will keep coming and could have a profound effect on the economy. “GM may be a dead man walking, but dead men can keep walking — as Frankenstein shows — as long as you feed them enough juice.”
Bulls Duck for Cover
While Bears Roar …
A contrary investor — and there were plenty of those around the Money Show — will tell you that all the bearishness I was hearing is a sign of a market bottom.
As one expert reminded us, an old saying on Wall Street is “to buy and sell stocks when Mr. Market goes on and off his meds.” The market is “off its meds” now. So if you follow this theory, we are a lot closer to a decent cyclical rally than most people think.
Maybe that’s true. And maybe next year the DC Money Show will be packed to the gills with companies and attendees. But until then, be careful out there — we’re already in a bear market. And there might be an even bigger bear lurking around the corner.
All the best,
Sean
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