STOCKS? BONDS? WHERE NOW?
by Mark Scheinbaum
American Reporter Correspondent
Lake Worth, Fla.
BOCA RATON, Fla., June 21, 2003 -- For someone who never owned a share of stock until February of this year, after a sojourn on Mars, or an outer galaxy, the past four months have been fantastic.
You could throw a dart at the S&P 500 or 100 Indices, the Dow Jones Industrial Average, the Nasdaq 100 or Russell 2000, and cash in your chips this week. Going "flat" for the rest of the year - depending on where and when you started - you might lock in a handsome 11 to 26 percent gain for 2003.
The problem is that the CNBC, Bloomberg, and other talking head anchors and analysts rarely show you a two, three, or four-year chart on these same indicators. Long-term, conservative investors, who held Ford, AT&T, Cisco, American Airlines, and hundreds of other companies through this period experienced real or de facto "reverse splits" in their portfolio. If you were lucky, and patient, you are now back to 1999 levels.
So, what do professional portfolio managers do as we hit the summer doldrums, high unemployment, a pending Freddie Mac scandal, a depressed U.S. dollar, but good retail sales and housing numbers?
I'll walk you through my own strategies, obviously not meant to be all things to all people.
First, the proper disclosure:
At our firm we handle more than $600 million in personal and institutional accounts and retirement accounts. They range from small IRA's, covered call writing/equity portfolios, mutual funds, variable annuity allocations, and a large sector in U.S. government agency bonds.
Most, but not all, of our accounts are conservative, investment grade portfolios, for high net worth individuals. They often require sophisticated hedging strategies not suitable for smaller accounts which could be handled with mutual funds or other instruments.
As I published earlier this year, January very strongly indicated that for 2003 both the DJIA and the S&P 500 (although I key on the narrower S&P 100 Index) will closely very slightly down for the year. Statistically it would be the equivalent of the rare four home runs in one game by a single player, if these indices were up more than single digit.
Since historically many large trust, bank, brokerage, and fund managers establish yearly models on January's results, I have urged a bit of cautious optimism here.
The same statistical models which have held since 1926 on quality stocks, and around the 1880s for stocks and bonds together, also show that it is very, very, very highly likely that the current positive psychology in the equity market could explode in 2004.
The consolidation and Spring rally of 2003 could quite easily drift downward to March support levels, and then a Bull Market equivalent to August, 1982 could erupt in Quarter I of next year.
The 1982 rally was of historical proportions, running through 1999 with only a brief blip backwards in the early 1990s for about 20 months.
As with the Great Depression, the "Crash of 1929" did not "bottom" until mid-1932, then starting the snail-like recovery to World War II.
For my own portfolios we took profits in an "over-weighted" position on large cap oil companies during the first week of the Iraq War. We do not know what OPEC will do. We do not know what free flowing Iraqi oil will do to the market. I have no clue as to whether a Bush energy policy regarding ethanol, natural gas, strategic reserves, and hybrid fuels for autos is policy or politics or both. Homey don't play that game. We moved our money elsewhere.
As Western European economies were more recession resistant in 2001-02 we also overweighted international quality stock funds. Most concentrations were European with some Australian stocks, but we stayed away from Latin America and northern Asia.
In the past month with a rising Euro making it more difficult for European producers to sell their goods anywhere, and unemployment holding at unacceptably high levels in France and Germany, we liquidated all of these positions as well.
We also cut back 50 to 75 percent of allocations in aggressive growth, small and mid-cap, and pure growth funds.
We are staying 30-45 percent in short-maturity high-grade corporate and government agency bonds, and moving most of our equity money into "total return" funds or equivalents. These funds carry category names such as "asset allocation," "total return," "balanced," "equity income," or "growth and income" by most major fund families.
In individual accounts we replicate the same stratgegies.
I like to look at the top 10 holdings in each of these portfolios, and also the sectors of concentration. If a majority of the sectors and stock favors are the same core issues we use in the accounts we personally manage, we will use these portfolios.
My personal strategy is to "park" large amounts of money in more conservative portfolios which pick up dividends no matter what happens to stock prices. Having locked in gains of, say, 20 percent for the year, I will give up the "home run" for the rest of the year for singles and doubles.
If my prediction is correct, and we retrace to January's levels, a portion of my 2003 gains will be retained as the more conservative and less volatile "total return" strategy mixes capital gains with interest and dividends.
There is no question that if we trade sideways into November and December, I will move substantial allocations back to a more aggressive stance ahead of the crowd expected to jump on a 2004 improving economic bandwagon.
I have intentionally not included NASDAQ stocks in this mix. With the exception for a few blue chip surrogates such as Microsoft and Dell, I view the OTC market as a highly speculative and under-regulated environment for traders and speculators, but not for my clients.
Mark Scheinbaum is chief investment strategist for Kaplan & Co. Securities, of Boca Raton, Fla., members, Boston Stock Exchange, NASD, SIPC, and a certified NASD arbitrator. He owns no individual stocks personally or for members of his family and buys only investment-grade, flexible premium, tax-deferred variable annuities for personal and retirement investments.