Commodities guru Jim Rogers says that Europe should let Greece default on its debt, and that the U.S. Federal Reserve needs to stop printing money, or else risk creating another serious financial crisis. Rogers tells Bloomberg that history shows the longer one delays dealing with a debt crisis, the more trouble it creates. He opposes further Greece bailouts, saying they are really bailouts of banks from France, Germany, and other countries that made bad loans in Greece — and he says other European taxpayers shouldn’t have to bail out those banks. Rogers also has harsh words for the Fed, saying its members are “dangerous people”.
While many are worrying that a Greece debt default will rock the stock market and financial world the way the Lehman Brothers collapse did in 2008, Mark Hulbert says there are several examples of sovereign debt crises that didn’t lead to long-term market woes or deep global crises.
“Prior to Greece’s recent difficulties, there have been at least four other occasions over the last two decades in which a potential sovereign default sent shockwaves throughout the markets,” Hulbert writes for MarketWatch. “The stock market, on average, rose over the two years following those previous crises.”
Hulbert points to the Mexican peso devaluation that started in late 1994; the “Asian contagion” that hit in 1997; the Russian ruble devaluation of 1998; and the Argentina debt/currency crisis of late 2001. On average, the market was 17% higher a year after those crises hit the headlines, Hulbert says, and it continued upward well into the second year.
While the rest of the investment world seems to be shunning Japanese stocks and large-cap stocks, two top fund managers — Oakmark’s David Herro and Bill Nygren — say that’s where they are finding value.
“We’re fully confident that our Japanese stocks will become a positive at some point for the fund — who knows when,” Herro told the Associated Press in reference to a fund he and Nygren co-manage. “Japan is the cheapest among the developed markets. Dividend payments are rising in Japan, and corporate performance has improved. Foreigners don’t care. Japan is kind of depressed. The yen is strong against the dollar. At some point, these things will ease up, and people will rediscover Japanese stocks.”
Herro says there are two real risks to that scenario: 1) a continuing strengthening of the yen, and 2) the trend of Japanese firms putting their cash holdings to work, rather than sitting on them. “If that reverses, then all bets are off,” he says.
Saying that a “3-D Hurricane” — debt, deficits, and demographics — is lingering on the horizon for the U.S., Rob Arnott is taking several steps to prepare his portfolio for an inflationary climate.
Arnott tells MarketWatch.com that the U.S. budget deficit is worse than many think, if you include entitlement program costs like Medicare, Medicaid, and Social Security. And with an aging population that will mean a shrinking workforce, he says he sees slower growth ahead — and the distinct possibility that the government will try to inflate its way out of debt.
“If we turn to the printing press as the way to reduce the value of our debt, which I think we probably will, that creates inflation risk,” he said, though he added, “I don’t want to be seen as a prophet of doom. What I’ve described is a doomsday scenario if we harbor the illusion that we can spend the way we’ve been spending.”
In the face of potential inflation, Arnott recommends a number of portfolio changes.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.
Wharton Professor and author Jeremy Siegel says stocks are more attractively priced than they’ve ever been during ultra-low interest rate periods, and says investors looking for yield should turn to high-dividend-paying stocks.
Price-to-earnings ratios around the world are reasonable and the quality of earnings is extraordinarily high, Siegel said at a Canadian Imperial Bank of Commerce event, according to Canada’s Financial Post. During low-interest-rate periods, the average P/E ratio has been 19% to 47% above current levels, Siegel contends.
Siegel also said that gold and commodities investors may be disappointed five years from now; he expects mining stocks to do better than commodities.
Top value fund manager Chuck Akre says that amid an uncertain economic environment and with inflation looming as a possible issue, companies with pricing power are attractive investments.
“At the end of the day it turned out that the best investments to own in the ’70s [when inflation at times raged] were businesses that have pricing power,” Akre tells the Associated Press. “And they’re probably the best things to own now. That’s the single best hedge against the unknown or high inflation or any of those issues.”
Akre, who’s been lagging the market in the short term but has a very strong long-term track record, says he is “not worried about a lot” of things right now, but he does have concerns about the broader economy and high unemployment rate. That’s part of why he’s high on off-price retailers like Dollar Tree and The TJX Companies.
Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Martin Zweig-inspired strategy, which has averaged 9.5% annualized returns since its inception nearly eight years ago, over a period in which the S&P 500 has returned 3.0% per year. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Zweig-based investment strategy.
Taken from the June 24, 2011 issue of The Validea Hot List
Guru Spotlight: Martin Zweig
Generally, my Guru Strategies have a distinct value bias. The majority of these models — ranging from my Benjamin Graham approach to my Warren Buffett model to my Joseph Piotroski strategy — are focused on finding good, often beaten-down stocks selling at bargain prices; that is, they target value stocks.
But that doesn’t mean that all of my gurus were cemented on the value side of the growth/value pendulum. In fact, the guru we’ll examine today, Martin Zweig, used a methodology that was dominated by earnings-based criteria. He looked at a stock’s earnings from a myriad of angles, wanting to ensure that he was getting stocks that had been producing strong growth over the long haul and even better growth recently — and that their growth was coming from the right sources.
Zweig’s thoroughness paid off. His Zweig Forecast was one of the most highly regarded investment newsletters in the country, ranking number one for risk-adjusted returns during the 15 years that Hulbert Financial Digest monitored it. It produced an impressive 15.9 percent annualized return during that time. Zweig has also managed several mutual funds, and was co-founder of Zweig Dimenna Partners, a multibillion-dollar New York-based firm that has been ranked in the top 15 of Barron’s list of the most successful hedge funds.
Zweig put his fortune to use in some pretty fun, flashy ways. He has owned what Forbes reported was the most expensive apartment in New York City, a penthouse atop Manhattan’s Pierre Hotel that was at one time valued at more than $70 million. But the strategy he used to compile that cash was a disciplined, methodical approach. His earnings examination of a firm spanned several categories:
Trend of Earnings: Earnings should be higher in the current quarter than they were a year ago in the same quarter.
Earnings Persistence: Earnings per share should have increased in each year of the past five-year period; EPS should also have grown in each of the past four quarters (vs. the respective year-ago quarters).
Ken Fisher says that, over the long term, stocks are a safer bet than bonds — if you have a time horizon of three years or longer. “If we think of next month, the likelihood is stocks are riskier than bonds are. If we think of 10 years, stocks are almost always less risky than bonds — lower volatility,” Fisher tells Bloomberg. Fisher also says sentiment conditions are leading him toward U.S. equities and away from emerging markets in the short term. And he talks about why he doesn’t like the Dow Jones Industrial Average as a stock index, why he thinks stop-losses are a very bad idea for investors, and how to know when to sell a stock.
While his China-focused fund has struggled in its first year, top U.K. fund manager Anthony Bolton says he’s sticking to his general approach — with some modifications — and continues to think Chinese stocks are packed with potential.
“I am pretty confident in the general approach,” Bolton tells The Telegraph. “I said before the fund was launched that I think the drivers of Chinese growth are changing and the areas of future growth will be different from those of the past. I’ve tried to focus on those areas which are domestic consumption and services orientated. I feel even more strongly that this is the case after the last year. My view is that Chinese stocks will go up.”
One way Bolton is adjusting his strategy, however: portfolio size. Before the launch of his fund, he thought he’d be holding about 60 stocks, he says. Now, he has about 120. “The number will come down a bit, but I think my original thoughts were wrong,” he says. “It’s going to be higher than 60.”