Dear Mr. Berko: I have a $207,000 IRA with good utilities, drug stocks, consumer staples and food stocks that hasn’t done much in a market that continues to go higher.
Please tell me why the market is doing so well in the face of all the negative economic news.
It doesn’t make sense. I’m tired of watching my supposedly good stocks stand still and would like you to recommend some aggressive issues that can add some excitement to my portfolio.
It seems that I am among the few people who are not making money in the market. — W.R.: Elkhart, Ind.
Dear W.R.: You are among the many folks who are not making money in this market.
Lots of folks are not making money in this market, but they are embarrassed to admit it, so they lie and tell you they’re making it big. Be mindful that investors seldom tell you abut their losses, only their profits, and then they lie about how much they made.
Two of the most powerful reasons that the stock market is doing well are, one, the Fed is printing money (close to $4 trillion by the end of 2010) that is flooding the market with liquidity. However, this liquidity is not inflationary (yet) because the banks are not lending. And because it doesn’t make sense to allow those trillions to collect “vault dust,” those trillions are used to buy securities.
Now, the value of the 3,066 issues on the NYSE is $14 trillion. Because the $4 trillion sloshing in the economy represents 30 percent of that $14 trillion in stocks, it’s no wonder the market was making new highs.
But it’s not folks like us who are benefiting from a rising Dow; it’s the money center banks and their good old boy pals. That’s the American way, while the common folks like us are bottom feeders.
The second reason the Dow is gamboling higher is low interest rates. Basically, “interest” is the cost one person pays to use another person’s money. The Fed keeps rates low by overwhelming the economy with new money. Because the economy is flooded with cash, and borrowing costs are near zero, investors are more willing to take extraordinary risks.
So in the face of terribly high unemployment, crashing home values, a seriously sick mortgage market, nearly nonexistent bank loans, unparalleled real estate foreclosures, a record deficit and national debt, the collapse of municipal pension funds, a state debt crisis, a do-nothing Congress, a shaky European Union, oil exceeding $80 a barrel, a possible decline in our GDP and corporate earnings for the coming quarter, what other reason could there be for higher stock prices?
OK! If you want some action, I recommend that you use $30,000 (15 percent of your $207,000 IRA) and invest $6,000 in each of the following. These issues may give you good exposure to potentially high return results.
Vanguard Emerging Markets (VWO, 52-week high of $49.33 as of Nov. 4), which tracks the 748 common stocks in the MSCI Emerging Market Index. Barclays High Yield Bond (JNK, 52-week high of $41.32 as of Nov. 4) has a $5 billion portfolio of junk bonds and yields 10.80 percent. Neuberger Berman Real Estate (NREAX, $10.85 as of Nov. 19) owns a variety of REITs and property development firms. Gateway Fund (GTECX, $25.71 as of Nov. 19) writes puts and calls against the S&P 500, as well as a basket of similar issues. Akre Focus (AKREX, $11.76 as of Nov. 19) is an aggressive small midcap fund. And Pimco EqS Pathfinder (PTHDX, $10.06 as of Nov. 19), run by two managers who are good at finding low-priced foreign stocks.
Unlike your utilities, drug and food stocks, these six issues participate in a wide spectrum of choices, giving you a little more zip for your doo-dah. And I’ll give you a guaranteed “maybe” that they will continue to do so as long as the market continues to move higher.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.