With the markets on the mend, fund manager David Ellison says there are great bargains to be had.
NEW YORK (Fortune) -- Now that the housing crisis looks like it's really hit bottom, it's a good time to be a financial services investor, says David Ellison, president of FBR funds.
"When things are good or great, you don't really make any money. What's the upside?" he says. "You don't get these opportunities very often to get through these cathartic events."
Back in the first quarter of last year, Ellison says there were too many uncertainties in the fundamentals of the economy. But now that the economy has come through that period and enough healing has taken place, investors can get back in the market without having to worry about quite so many unknowns.
He points to residential real estate, where prices have fallen an average of 30% from their 2006 peak. "We haven't had a nationwide decline in residential real estate in this country in almost anyone's lifetime." Prices don't need to rise back to boom-time levels -- in fact, he would rather they stay in line with inflation or GDP growth. They just have to level out, and inventories need to come down.
0:00 /2:55Bank stocks too hot?
During the last boom, banks were over-lending and making risky bets to produce higher returns. Ellison believes the slump has forced them to return to traditional lending standards and practices, which bodes well for their profitability in years to come.
He says banks are going to spend the next five years taking down risk and complexity. And people are buying homes to live in, not to flip. "The guys that can make loans today are going to be the guys that have the profit tomorrow to pay off the bad loans they made two years ago," he says.
Ellison managed to avoid devastating losses during the meltdown. He began shifting out of stocks six or seven quarters ago, when he saw banks reporting big increases in non-performing loans. At one point he had 60% of his portfolios in cash. Currently, both funds are less than 5% in cash, he says.
As a result of his timely moves, his FBR Small Cap Financial fund (FBRSX), which has $220.7 million in assets, is up about 1% from a year ago and about 25% from the start of the year, according to Morningstar. His FBR Large Cap Financial fund (FBRFX), with $44.7 million in assets, is down less than 1% from a year ago but up almost 40% so far this year.
But since the second quarter of 2009 he's moved his money into financial stocks. "The overriding assumption is five years from now most of the banks will be better than they are today," he says.
In his large cap portfolio, Ellison concentrates on the giants; according to Morningstar, Bank of America (BAC, Fortune 500) and J.P.Morgan Chase (JPM, Fortune 500) are his two largest holdings. "This is the American banking system," he says. "It's very simple."
In his small-cap fund, Ellison divides his portfolio into thirds. One-third is companies he knows are going to make it, and another third is companies that are good but not great, perhaps trading at a 30% discount and might double or triple your money. The final third is the best of the worst. The stocks are very cheap, and if they make it, investors will do well off them.
His top holdings in his small cap fund include Webster Financial Corp (WBS), Fifth Third Bancorp (FITB, Fortune 500), Astoria Financial Corporation (AF), and TCF Financial Corporation (TCB), according to Morningstar.
Source: money.cnn.com
Tuesday, September 22, 2009
Tuesday, September 15, 2009
Investing in "cheap" stocks
Investing in cheap stocks, or stocks under 1 dollar per share, is indeed risky, but sometimes it is worth the risk. A few years ago I invested in Calpine Energy the symbol at the time was CPNLQ. I bought it at around .23 and sold it around .50, I made a nice little chunk of change, but I continued to keep an eye on Calpine. It went all the way up to over 4 dollars a share, I was really kicking myself for not holding on to that one. Even though the company was going through financial troubles, the stock price continued to rise. It has been a habit of mine for a while now to look for stocks priced under a dollar, and go from there. It has payed off more times than not, you just have to do a little research on the company first. If a company is down on its luck, but has great potential for rapid success in the near future, I buy, buy, buy. I still like energy stocks, most of them are companies that have been around for a while and now how to run their business. Just because a company is down, certainly isn't a reason not to buy. Look at Sirius XM Radio and Ford, they were both way down, facing financial trouble, and now they are both on the way back up. If they reach the prices they were trading at before the downfall, I for one, will have made enough to take a nice family vacation (even after taxes).
Monday, September 14, 2009
Investing in the 'new normal'
There's no question that this isn't a typical recession, and money manager Ron Muhlenkamp says it's time to reset expectations.
By Mina Kimes, writer-reporter
September 2, 2009: 4:33 AM ET
NEW YORK (Fortune) -- Money manager Ron Muhlenkamp gets a lot of credit for his bold, macro-driven investing style, and he deserves it: His namesake fund has returned 9% annually over the last 15 years, 2% better than the S&P 500.
Last year, however, his portfolio took a heavy blow: The Muhlenkamp Fund (MUHLX), which owned holdings in the insurance and mortgage sectors, lost 40% of its value, worse than the blue-chip index.
But when the market was at its nadir, Muhlenkamp hunted for values, picking up shares of beaten-down names like IBM (IBM, Fortune 500) and Legg Mason (LM, Fortune 500). Those picks have since soared, and his fund has recouped much of its losses: It's up 25% so far this year, 18 points higher than other large-value funds, according to Morningstar.
Despite his improved outlook, the manager, who lives on a farm in Western Pennsylvania and loves Harley Davidson motorcycles (he believes Harley's (HOG, Fortune 500) stock is an economic bellwether), says the days of go-go growth are over.
"We fell off a cliff last fall, and things have basically flatlined," he said in a recent conversation with Fortune. "This is not a normal cyclical recession -- this time, people have reset their expectations."
In your latest quarterly letter to shareholders, you wrote that the economy is setting a lower base for expansion. How will that affect the market?
A lot of folks talk about "the new normal." The consumer went from spending 100% to 95%. If you drop by 5%, it takes three years just to get back to where you were. During that time, margins are going to be tight. Every industry we can find has ample capacity, and profitability is going to be less than what it was.
For the market, fair value today is about 15-20% lower than what it was a year ago. We think there will be a 15% drop in return on equity, our favorite metric. Price to earnings ratios should be below what they were.
Does "the new normal" offer any opportunities for growth?
In 2001, we had a normal recession. Coming out, we owned a lot of homebuilders and discretionary stocks, but the things that lead one expansion don't lead the next. If I'm right and the consumer has really cut back this time, then you want to go where the consumer is going with his savings. So there's that extra 5% -- where does it go?
One area where I think there's going to be huge demand is financial advice. What I haven't been able to get a handle on is -- which vendors of financial advice still have a good reputation?
Right now, we own Bank of America (BAC, Fortune 500), which, along with Merrill Lynch, serves some 50% of the households in the U.S. If they can capitalize on that, there's a huge opportunity.
You wrote this spring that you were puzzled by the continued decline in share prices of "great companies." Since then, many blue-chip stocks have bounced back. Is it time to look at lesser known names?
The little stuff has come back more, and all year we've found more value in the big stuff. Size is irrelevant, though. If companies earn good money over time and don't blow it, their stocks will reflect that. Cisco (CSCO, Fortune 500) or IBM or Oracle (ORCL, Fortune 500) at 12 times earnings? That's a good bet.
They're world class companies that sell to a world market. As China and India and Brazil grow faster than the U.S., that's a way I can participate with accounting I trust.
Nearly a quarter of the stocks in your portfolio are in the health care sector, including managed care company UnitedHealth. Are you worried about headwinds from potential reform?
How can you have a health care system without UnitedHealth (UNH, Fortune 500)? The best time to buy pharmaceutical or health care stocks has always been in election years, because that's when everyone beats up on the industry. Right now, any positive news about health care would be a surprise.
In my business, you make money on the difference between perception and reality. When everyone expects the bad, that's when you get the chance to buy Pfizer (PFE, Fortune 500), which we own, for cheap.
Is there any sector you're bearish on?
We don't own any utilities -- the time to own them was last year. Of course, we didn't own them then (laughs). If we're any good at picking and choosing stocks, we should do better than utilities. They generate average returns, and I've never aspired to be average.
Source: money.cnn.com
By Mina Kimes, writer-reporter
September 2, 2009: 4:33 AM ET
NEW YORK (Fortune) -- Money manager Ron Muhlenkamp gets a lot of credit for his bold, macro-driven investing style, and he deserves it: His namesake fund has returned 9% annually over the last 15 years, 2% better than the S&P 500.
Last year, however, his portfolio took a heavy blow: The Muhlenkamp Fund (MUHLX), which owned holdings in the insurance and mortgage sectors, lost 40% of its value, worse than the blue-chip index.
But when the market was at its nadir, Muhlenkamp hunted for values, picking up shares of beaten-down names like IBM (IBM, Fortune 500) and Legg Mason (LM, Fortune 500). Those picks have since soared, and his fund has recouped much of its losses: It's up 25% so far this year, 18 points higher than other large-value funds, according to Morningstar.
Despite his improved outlook, the manager, who lives on a farm in Western Pennsylvania and loves Harley Davidson motorcycles (he believes Harley's (HOG, Fortune 500) stock is an economic bellwether), says the days of go-go growth are over.
"We fell off a cliff last fall, and things have basically flatlined," he said in a recent conversation with Fortune. "This is not a normal cyclical recession -- this time, people have reset their expectations."
In your latest quarterly letter to shareholders, you wrote that the economy is setting a lower base for expansion. How will that affect the market?
A lot of folks talk about "the new normal." The consumer went from spending 100% to 95%. If you drop by 5%, it takes three years just to get back to where you were. During that time, margins are going to be tight. Every industry we can find has ample capacity, and profitability is going to be less than what it was.
For the market, fair value today is about 15-20% lower than what it was a year ago. We think there will be a 15% drop in return on equity, our favorite metric. Price to earnings ratios should be below what they were.
Does "the new normal" offer any opportunities for growth?
In 2001, we had a normal recession. Coming out, we owned a lot of homebuilders and discretionary stocks, but the things that lead one expansion don't lead the next. If I'm right and the consumer has really cut back this time, then you want to go where the consumer is going with his savings. So there's that extra 5% -- where does it go?
One area where I think there's going to be huge demand is financial advice. What I haven't been able to get a handle on is -- which vendors of financial advice still have a good reputation?
Right now, we own Bank of America (BAC, Fortune 500), which, along with Merrill Lynch, serves some 50% of the households in the U.S. If they can capitalize on that, there's a huge opportunity.
You wrote this spring that you were puzzled by the continued decline in share prices of "great companies." Since then, many blue-chip stocks have bounced back. Is it time to look at lesser known names?
The little stuff has come back more, and all year we've found more value in the big stuff. Size is irrelevant, though. If companies earn good money over time and don't blow it, their stocks will reflect that. Cisco (CSCO, Fortune 500) or IBM or Oracle (ORCL, Fortune 500) at 12 times earnings? That's a good bet.
They're world class companies that sell to a world market. As China and India and Brazil grow faster than the U.S., that's a way I can participate with accounting I trust.
Nearly a quarter of the stocks in your portfolio are in the health care sector, including managed care company UnitedHealth. Are you worried about headwinds from potential reform?
How can you have a health care system without UnitedHealth (UNH, Fortune 500)? The best time to buy pharmaceutical or health care stocks has always been in election years, because that's when everyone beats up on the industry. Right now, any positive news about health care would be a surprise.
In my business, you make money on the difference between perception and reality. When everyone expects the bad, that's when you get the chance to buy Pfizer (PFE, Fortune 500), which we own, for cheap.
Is there any sector you're bearish on?
We don't own any utilities -- the time to own them was last year. Of course, we didn't own them then (laughs). If we're any good at picking and choosing stocks, we should do better than utilities. They generate average returns, and I've never aspired to be average.
Source: money.cnn.com
Friday, September 11, 2009
Retail Stock Surprise: Sears Tops Poll
NEW YORK (TheStreet) -- Department stores, on the whole, rallied this week, but surprisingly Sears(SHLD Quote) ranked as the winner in sector among TheStreet readers.
Sears was favored as the hottest stock with 31.5% of the total vote, beating out Kohl's(KSS Quote), which has -- unlike Sears -- been a consistent winner in the sector.
Jim Cramer said in his State of the Market report on Wednesday that Sears is garnering too much attention.
Still, investors sent shares of the company up 3% this week to close at $64.18.
Kohl's came in a close second with 27.5% of the vote. Earlier in the month, the company reported a 0.2% jump in August same-store sales, surpassing analysts' expectations of a 1.7% decline. Kohl's has won over shoppers with its private-label and exclusive merchandise at wallet-friendly prices.
Shares of the company grew 2.5% to close at $55.18 on Friday.
J.C. Penney(JCP Quote) came in third in the survey at 17.8%.
On Friday, that company launched "she said," a contemporary career sportswear brand catering to the female professional.
Experts predicted the company would perform better in August from the back-to-school sales increase, but it fell short of expectations, with same-store sales sinking 7.9%, lower than the 6.7% drop forecast.
Dillards(DDS Quote) placed fourth in the poll with 13.8%, while shares of the company soared 11% to close at $12.84 on Friday.
Macy's(M Quote) ranked last with only 9.4% of the total vote. The department store has been struggling to rein in shoppers, and in the second quarter it was dragged down by its furniture, mattress and handbag segments.
Same-store sales in August tanked by 8.1%, more than the 7.4% decline expected by analysts. Regardless, shares of the company closed off the week up 6% to $16.09.
-- Reported by Jeanine Poggi in New York
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Source: thestreet.com
Sears was favored as the hottest stock with 31.5% of the total vote, beating out Kohl's(KSS Quote), which has -- unlike Sears -- been a consistent winner in the sector.
Jim Cramer said in his State of the Market report on Wednesday that Sears is garnering too much attention.
Still, investors sent shares of the company up 3% this week to close at $64.18.
Kohl's came in a close second with 27.5% of the vote. Earlier in the month, the company reported a 0.2% jump in August same-store sales, surpassing analysts' expectations of a 1.7% decline. Kohl's has won over shoppers with its private-label and exclusive merchandise at wallet-friendly prices.
Shares of the company grew 2.5% to close at $55.18 on Friday.
J.C. Penney(JCP Quote) came in third in the survey at 17.8%.
On Friday, that company launched "she said," a contemporary career sportswear brand catering to the female professional.
Experts predicted the company would perform better in August from the back-to-school sales increase, but it fell short of expectations, with same-store sales sinking 7.9%, lower than the 6.7% drop forecast.
Dillards(DDS Quote) placed fourth in the poll with 13.8%, while shares of the company soared 11% to close at $12.84 on Friday.
Macy's(M Quote) ranked last with only 9.4% of the total vote. The department store has been struggling to rein in shoppers, and in the second quarter it was dragged down by its furniture, mattress and handbag segments.
Same-store sales in August tanked by 8.1%, more than the 7.4% decline expected by analysts. Regardless, shares of the company closed off the week up 6% to $16.09.
-- Reported by Jeanine Poggi in New York
Follow TheStreet.com on Twitter and become a fan on Facebook.
Source: thestreet.com
Wednesday, September 9, 2009
Industrials, financials pull stock market higher
By TIM PARADIS (AP)
NEW YORK — The stock market extended its gains to a fourth day as the Federal Reserve said the economy was stabilizing.
The Standard & Poor's 500 index, which is the basis for many mutual funds, reached an 11-month high as industrial stocks rallied. The Dow Jones industrial average rose 50 points to its second-highest close of the year.
The market stumbled briefly following the release of the Fed's report on regional economies, which also found that consumer spending would rise but only because of car purchases linked to the government's brief Cash for Clunkers program. The report also said the job market remains weak.
The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed's warning about it deflated some of the market's optimism. About 70 percent of the U.S. economy depends on spending by consumers.
Matt Lloyd, chief investment strategist at Advisors Asset Management, said investors were jittery following the Fed's report because many traders are fearful of a correction following a 50 percent surge in stocks over the past six months.
"To me there is no conviction" behind the market's recent gains, Lloyd said.
The Dow rose 49.88, or 0.5 percent, to 9,547.22. The index has added 267 points, or 2.9 percent, in four days. It was the Dow's second-highest close of the year, just below its Aug. 27 close.
The broader Standard & Poor's 500 index gained 7.98, or 0.8 percent, to 1,033.37, while the Nasdaq composite rose 22.62, or 1.1 percent, to 2,060.39. It was the highest close for the S&P 500 index and the Nasdaq since October.
The Russell 2000 index of smaller companies rose 10.02, or 1.7 percent, to 586.40.
Advancing stocks outpaced those that fell by about 5-to-2 on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.3 billion Tuesday.
Jeff Kleintop, chief market strategist at LPL Financial Services, said a break in the rally could be good for the market to keep stocks from racing too high, too quickly.
"I think we're maybe due for a little bit of consolidation," he said.
Kleintop also contends that economic readings are becoming a less powerful force on the market as more investors begin to expect an improvement in the economy.
"Economic data has lost a lot of its power to really move the market around. The consensus has now become we're in a recovery."
Light, sweet crude rose 20 cents to settle at $71.31 per barrel on the New York Mercantile Exchange. Gold fell but still hovered near $1,000 after crossing that mark Tuesday for the first time since February.
Industrial shares were the biggest gainers, as investors bet that higher commodity prices will translate to increased profits if the economy strengthens. The weaker dollar also makes the goods of U.S. exporters cheaper outside the U.S.
Caterpillar Inc. was among the strongest advancers of the 30 stocks that make up the Dow industrials. Shares of the maker of construction and mining equipment rose $1.44, or 3.1 percent, to $48.41.
Boeing Co. rose $1.03, or 2.1 percent, to $50.53, while General Electric Co. rose 37 cents, or 2.6 percent, to $14.87.
Bond prices mostly rose. The yield on the 10-year Treasury note was flat at 3.48 percent.
Haag Sherman, chief investment officer at Salient Partners in Houston, said investors' demand for stronger returns is weighing on the dollar, though he notes that the 10-year Treasury note has held its ground as some investors remain skeptical about a rebound in the economy.
"The 10-year really hasn't been punished as much lately. I think there is a tug-of-war between the equity and the bond market."
Overseas, Japan's Nikkei stock average fell 0.8 percent. Britain's FTSE 100 rose 1.2 percent, Germany's DAX index rose 1.7 percent, and France's CAC-40 advanced 1.3 percent.
Copyright © 2009 The Associated Press. All rights reserved.
Source: Associated Press
NEW YORK — The stock market extended its gains to a fourth day as the Federal Reserve said the economy was stabilizing.
The Standard & Poor's 500 index, which is the basis for many mutual funds, reached an 11-month high as industrial stocks rallied. The Dow Jones industrial average rose 50 points to its second-highest close of the year.
The market stumbled briefly following the release of the Fed's report on regional economies, which also found that consumer spending would rise but only because of car purchases linked to the government's brief Cash for Clunkers program. The report also said the job market remains weak.
The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed's warning about it deflated some of the market's optimism. About 70 percent of the U.S. economy depends on spending by consumers.
Matt Lloyd, chief investment strategist at Advisors Asset Management, said investors were jittery following the Fed's report because many traders are fearful of a correction following a 50 percent surge in stocks over the past six months.
"To me there is no conviction" behind the market's recent gains, Lloyd said.
The Dow rose 49.88, or 0.5 percent, to 9,547.22. The index has added 267 points, or 2.9 percent, in four days. It was the Dow's second-highest close of the year, just below its Aug. 27 close.
The broader Standard & Poor's 500 index gained 7.98, or 0.8 percent, to 1,033.37, while the Nasdaq composite rose 22.62, or 1.1 percent, to 2,060.39. It was the highest close for the S&P 500 index and the Nasdaq since October.
The Russell 2000 index of smaller companies rose 10.02, or 1.7 percent, to 586.40.
Advancing stocks outpaced those that fell by about 5-to-2 on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.3 billion Tuesday.
Jeff Kleintop, chief market strategist at LPL Financial Services, said a break in the rally could be good for the market to keep stocks from racing too high, too quickly.
"I think we're maybe due for a little bit of consolidation," he said.
Kleintop also contends that economic readings are becoming a less powerful force on the market as more investors begin to expect an improvement in the economy.
"Economic data has lost a lot of its power to really move the market around. The consensus has now become we're in a recovery."
Light, sweet crude rose 20 cents to settle at $71.31 per barrel on the New York Mercantile Exchange. Gold fell but still hovered near $1,000 after crossing that mark Tuesday for the first time since February.
Industrial shares were the biggest gainers, as investors bet that higher commodity prices will translate to increased profits if the economy strengthens. The weaker dollar also makes the goods of U.S. exporters cheaper outside the U.S.
Caterpillar Inc. was among the strongest advancers of the 30 stocks that make up the Dow industrials. Shares of the maker of construction and mining equipment rose $1.44, or 3.1 percent, to $48.41.
Boeing Co. rose $1.03, or 2.1 percent, to $50.53, while General Electric Co. rose 37 cents, or 2.6 percent, to $14.87.
Bond prices mostly rose. The yield on the 10-year Treasury note was flat at 3.48 percent.
Haag Sherman, chief investment officer at Salient Partners in Houston, said investors' demand for stronger returns is weighing on the dollar, though he notes that the 10-year Treasury note has held its ground as some investors remain skeptical about a rebound in the economy.
"The 10-year really hasn't been punished as much lately. I think there is a tug-of-war between the equity and the bond market."
Overseas, Japan's Nikkei stock average fell 0.8 percent. Britain's FTSE 100 rose 1.2 percent, Germany's DAX index rose 1.7 percent, and France's CAC-40 advanced 1.3 percent.
Copyright © 2009 The Associated Press. All rights reserved.
Source: Associated Press
Tuesday, September 8, 2009
U.S. stocks rise as investors speculate about gold, crude
Equities analysts see stronger economy and inflation ahead
By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- As the rising price of commodities helped bolster the U.S. stock market Tuesday, investors found a mixed message in surging gold and crude.
"The stock market is fine, as long as the economy and earnings hold up. The challenge will be rising inflation and interest rates," said Hugh Johnson, chairman of Johnson Illington Advisors.
"Everything we saw last week pointed to a stronger economy with higher inflation," said Johnson of recent economic data, including a survey by the Institute for Supply Management released last Thursday, which found prices paid by purchasing managers climbed to 63.1% in August from 41.3% the month before.
On Tuesday, energy and materials companies led broad market gains as the major U.S. indexes extended their advance to a third session.
The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,497, +56.15, +0.60%) gained 56.07 points, or 0.6%, to end at 9,497.34, while the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,025, +8.99, +0.88%) added 8.99 points, or 0.9%, to 1,025.39 and the Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,038, +18.99, +0.94%) rose 18.99 points, or 0.9%, to 2,037.77. More data: Market Overview.
While gold bugs point to inflation as being behind the precious metal's climb, gold ETF money flows suggest otherwise, said Jack Ablin, chief investment officer at Harris Private Bank.
"The ratio of bullish ETFs to bearish ETFs in gold has explained a better part of the commodity's movement since their introduction in 2007. Inflation-protected Treasury securities, or TIPs, offer a better indication of inflation expectations. The five-year TIP security currently implies a meager 1.4% annual CPI for the next five years," wrote Ablin in a Tuesday note. "Given the disparity, I'm inclined to side with the Treasury market." See Bond Report.
Hopes for an economic recovery are supportive of both equities and the price of crude, which advanced $3.08, or 4.5%, to $71.10 a barrel. Read Futures Movers.
Should oil shoot higher for some reason other than the economy, the rise is no longer bullish for equities, said David Kelly, chief market strategist at J.P. Morgan Funds.
In the third quarter of 2008, 3.5% of GDP was devoted solely to buying foreign oil -- "a significant tax on the U.S. economy," Kelly said.
Conversely, speculation about higher inflation on the horizon fueled buying in gold as well as in shares of basic-materials companies but brought a bearish tint to the broad stock market.
On the New York Mercantile Exchange, gold futures on Tuesday climbed to an 18-month high of $1,006.90 an ounce but ended beneath the quadruple-digit threshold at $997.90. See Metals Stocks.
Dan Greenhaus, chief economic strategist at Miller Tabak & Co., called gold's spike above $1,000 an ounce and crude's surge above $71 a barrel "symptoms" of the greenback's decline to its lowest level since the fall of 2008.
"As the dollar moves lower and expectations continue to look for even further weakness, upward pressure on various commodities including gold and oil will be the order of the day," said Greenhaus.
Trading in both crude and gold futures is denominated in U.S. dollars.
"Gold is a completely speculative play. It's only worth what someone else is willing to pay for it," said Kelly.
"Oil is being used more and more as a speculative football, as there is no supply imbalance now [to drive prices up] -- part of it is people are getting in as an investment," he said.
Kate Gibson is a reporter for MarketWatch, based in New York.
Source: Marketwatch
By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- As the rising price of commodities helped bolster the U.S. stock market Tuesday, investors found a mixed message in surging gold and crude.
"The stock market is fine, as long as the economy and earnings hold up. The challenge will be rising inflation and interest rates," said Hugh Johnson, chairman of Johnson Illington Advisors.
"Everything we saw last week pointed to a stronger economy with higher inflation," said Johnson of recent economic data, including a survey by the Institute for Supply Management released last Thursday, which found prices paid by purchasing managers climbed to 63.1% in August from 41.3% the month before.
On Tuesday, energy and materials companies led broad market gains as the major U.S. indexes extended their advance to a third session.
The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,497, +56.15, +0.60%) gained 56.07 points, or 0.6%, to end at 9,497.34, while the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,025, +8.99, +0.88%) added 8.99 points, or 0.9%, to 1,025.39 and the Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,038, +18.99, +0.94%) rose 18.99 points, or 0.9%, to 2,037.77. More data: Market Overview.
While gold bugs point to inflation as being behind the precious metal's climb, gold ETF money flows suggest otherwise, said Jack Ablin, chief investment officer at Harris Private Bank.
"The ratio of bullish ETFs to bearish ETFs in gold has explained a better part of the commodity's movement since their introduction in 2007. Inflation-protected Treasury securities, or TIPs, offer a better indication of inflation expectations. The five-year TIP security currently implies a meager 1.4% annual CPI for the next five years," wrote Ablin in a Tuesday note. "Given the disparity, I'm inclined to side with the Treasury market." See Bond Report.
Hopes for an economic recovery are supportive of both equities and the price of crude, which advanced $3.08, or 4.5%, to $71.10 a barrel. Read Futures Movers.
Should oil shoot higher for some reason other than the economy, the rise is no longer bullish for equities, said David Kelly, chief market strategist at J.P. Morgan Funds.
In the third quarter of 2008, 3.5% of GDP was devoted solely to buying foreign oil -- "a significant tax on the U.S. economy," Kelly said.
Conversely, speculation about higher inflation on the horizon fueled buying in gold as well as in shares of basic-materials companies but brought a bearish tint to the broad stock market.
On the New York Mercantile Exchange, gold futures on Tuesday climbed to an 18-month high of $1,006.90 an ounce but ended beneath the quadruple-digit threshold at $997.90. See Metals Stocks.
Dan Greenhaus, chief economic strategist at Miller Tabak & Co., called gold's spike above $1,000 an ounce and crude's surge above $71 a barrel "symptoms" of the greenback's decline to its lowest level since the fall of 2008.
"As the dollar moves lower and expectations continue to look for even further weakness, upward pressure on various commodities including gold and oil will be the order of the day," said Greenhaus.
Trading in both crude and gold futures is denominated in U.S. dollars.
"Gold is a completely speculative play. It's only worth what someone else is willing to pay for it," said Kelly.
"Oil is being used more and more as a speculative football, as there is no supply imbalance now [to drive prices up] -- part of it is people are getting in as an investment," he said.
Kate Gibson is a reporter for MarketWatch, based in New York.
Source: Marketwatch
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