STAR-BULLETIN SURVEY OF BEST INVESTMENT IDEAS
GEORGE F. LEE / GLEE@STARBULLETIN.COM
Stock picker Alan Matsuda advises clients from his home in Hawaii Kai.
Some local stock experts bracing for a recession
Certified financial planner Alan Matsuda's hypothetical portfolio was up 8.3 percent at midyear despite a lackluster market
The "R" word is starting to make the rounds.
It's been five years since the United States sank into a recession, but local stock experts say the economy appears to be heading down that path again.
The stock market has struggled in the wake of the Federal Reserve's 17 straight interest-rate increases and, with about $2 trillion in adjustable rate mortgages due to be reset in the next 18 months, Americans are going to be spending less money and piling up more debt.
"If the Fed doesn't stop increasing rates, recession is a heartbeat away," said Alan Matsuda, a Hawaii Kai-based certified financial planner and registered investment adviser. "As the saying goes, those who don't learn from history -- such as the Great Depression of the 1930s -- are doomed to repeat it."
Despite the doomsday scenario, Matsuda trounced the market and his competitors during the first six months of the year in the annual Star-Bulletin survey of best investment ideas. He had a total return at midyear of 8.3 percent to boost his hypothetical $20,000 portfolio to $21,664.21.
Barry Hyman, vice president-management team for the Maui branch of Michigan-based FIM Group Ltd., was second with a 3.9% gain to $20,779.50. Maui resident Irwin Yamamoto, editor and publisher of The Yamamoto Forecast, was up 2.3 percent to $20,450.82 with his all-cash position. Dwight Melton, the two-time defending contest champion and co-founder of the Hawaii Stocks and Options Group, remained in fourth with a 0.9 percent gain to $20,172.16. Richard Dole, chief executive of Honolulu investment banker Dole Capital LLC and the first-quarter leader, was down 0.1 percent to $19,971.18. And Norm Caris, who lives on Kauai and is managing director-institutional sales for Caris and Co., a national institutional research firm, was last with a 5.6 percent loss to $18,870.24.
Matsuda, whose top performer was streetTRACKS Gold Trust (up 18.7 percent), said the market is in for a bumpy ride during the second half of this year.
He cited uncertainty over oil and gold prices, worry over when interest-rate increases will end, Congress and President Bush balancing next year's federal budget and financing a big deficit, Iran potentially pricing its oil in eurodollars, the November election in which the Republicans could lose their majority in both houses due to Bush's low approval rating, and provocative events by rogue nations, such as North Korea.
Matsuda was the only investor who posted gains with each of his selections. Scudder Global Commodities Stock Fund was up 9.8 percent; Seaspan, an ocean shipper which he added to his portfolio after the first quarter, rose 0.9 percent; and iShares MSCI South Korea Index Fund gained 0.8 percent. He also had more than $950 in cash earning 4.6 percent.
Hyman, who like Matsuda also selected streetTRACKS Gold Trust, also is treading softly.
"I have been saying for some time that equity investors are exhibiting a high level of complacency and unrealistic optimism," Hyman said. "Most equities, not just domestic stocks but in many foreign markets as well with the run-up in many international stocks, are priced well above the intrinsic values of the underlying companies, implying investors expect dramatic increases in earnings."
Hyman said such expectations might make more sense at the beginning of a new expansion coming out of an economic downturn. However, he said with monetary tightening globally along with other headwinds, economies are not poised for acceleration.
Among his conservative picks during the first half of the year were iShares Lehman 1-3 Year Treasury Bond Fund (up 1.0 percent) and Western Asset/Claymore U.S. Treasury Inflation Protected Security Fund (down 2.7 percent). However, with the market stagnating and his expectation of continued instability, Hyman is selling streetTRACKS and Western Asset for this quarter and buying 21st Century Holding and Short MidCap400 ProShares. 21st Century Holding is a Florida insurer selling at less than four times expected earnings and yielding 3.7 percent.
"I had this in my portfolio last year, and with the stock selling off at the start of the hurricane season this year, it is a tremendous bargain," Hyman said.
His other pick, Short MidCap 400 ProShares, is a new exchange-traded fund that is the inverse of the MidCap 400 index.
"With U.S. stocks still looking broadly overvalued and a likely slowdown in earnings expected -- along with possible multiple compression (the stock price not keeping up with earnings) -- if inflation stays above the Fed's comfort level, U.S. stocks should decline by more than TIPS (Treasury Inflation Protected Securities) rise," he said.
Yamamoto has stayed in cash and this quarter is switching his entire portfolio from American Partners Bank to HSBCdirect, a bank savings account that is paying a 4.95 percent yield, the highest in the country according to Bankrate. com. He pointed out that his all-cash position for the first six months beat the Standard & Poor's 500 index (up 1.8 percent) and Nasdaq composite index (down 1.5 percent), albeit trailing the Dow Jones industrial average (up 4.0 percent).
"At the end of the year, I still think the (bank) yield will beat the total return of the market," said Yamamoto, who is ranked as a top stock market timer and one of the top bond timers in the nation by Timer Digest.
He is advising his clients to invest 100 percent in cash and said both his short-term and long-term indicators are bearish for bonds, stocks and gold.
"The best-case scenario is that the economy is facing a significant business slowdown, and the market looks six to nine months in advance. So in 2006 the market will be looking at 2007," Yamamoto said. "The worst-case scenario is in 2007 we'll have an outright recession. Early in the year when the market was really strong, I was quoted (in media outlets) as saying there would be a recession in 2007, and I have not altered my stance a bit."
Yamamoto also is concerned about the changing of the guard in the Fed chairman post to Ben Bernanke from Alan Greenspan.
"What's scary about this is with Bernanke we have a rookie in there," Yamamoto said. "I don't doubt he's a smart guy, but he's a rookie with limited experience coming from a world of theory, and theory and reality collide sometimes. I think that's what's going to happen."
Yamamoto said it's already too late for the Fed to do anything to stop the economy from tanking because consumers haven't prepared themselves.
"You've going to have $2 trillion of adjustable mortgages being reset across the country, you have higher oil prices and that takes away from the consumers again, and you also have credit card companies that have raised the monthly minimum, and then you have inflation eating away at the consumers again," Yamamoto said.
He said when people refinanced their mortgages, what a lot of them did instead of saving the difference was buy new SUVs, Lexuses and other high-priced cars.
" I think people are just getting by on their monthly payments, and when businesses start cutting back and people start losing their jobs, it's going to be a disaster," Yamamoto said.
Melton, who focuses on momentum stocks, is dropping two of the stocks he added last quarter in favor of Daktronics, which supplies electronic scoreboards and various display systems for sports, business and government; and TETRA Technologies, an oil and gas services company. Daktronics was up 95 percent during the first six months and TETRA was ahead 99 percent. He is getting rid of Brightpoint (down 47.8 percent), a wireless communications provider; and Plexus (down 8.9 percent), which supplies services for electronic components.
His best gainer so far has been Hansen Natural, a beverage company he selected in the second quarter and returned 51 percent. His only holdover stock from the beginning of the year is Joy Global (up 30.8 percent), which makes heavy equipment for the coal-mining industry.
Unlike some of his local peers, Melton is looking for a strong second half of the year once the Fed stops raising rates.
"Fears of slowing economic growth, increasing inflation, and faltering earnings combined to send stocks lower (in the first half of 2006)," he said. "I think these fears are overblown. The market could be in position if the economy and profits continue to perform reasonably well to rebound nicely in the second half."
Dole, who saw his 7.8 percent first-quarter gain evaporate, had two double-digit gainers in Newport (up 19.1 percent), a supplier of scientific and technical instruments; and defense giant Lockheed Martin (up 13.7 percent). But his one local pick, Alexander & Baldwin Co., stumbled 17.6 percent as competition took its toll on A&B's Matson Navigation subsidiary.
"The prices of all my picks dipped in the second quarter, primarily due to market conditions," Dole said. "The fundamentals of the companies have not changed. I continue to favor industries in defense and infrastructure, health care, and technology, together with stocks of companies with good cash flow and strong balance sheets."
Caris, who is bullish on semiconductor stocks, saw his two picks in that sector, Novellus Systems (up 2.4 percent) and Taiwan Semiconductor (down 1.8 percent) hover near the flatline at midyear. His best performer was optical supplier Oakley, up 14.7 percent. His one local pick, Hawaiian Airlines parent Hawaiian Holdings Inc., fell 14.8 percent.
"A series of missteps at Intel had effectively derailed the semiconductor food chain," Caris said. "Since then, Intel has significantly closed the technology gap with Advanced Micro Devices."
He said the release of Microsoft's Windows Vista, expected early next year, should provide a catalyst for another PC upgrade cycle, which could significantly increase chip demand.
"That should, in turn, create strong demand for semi-cap equipment names like Novellus, which we see as the best play in this space, and Taiwan Semiconductor, which will likely be another primary beneficiary of order growth in chips," he said.
Caris said his firm remains very bearish on housing, especially on the West Coast.
2006 YEAR-END FORECASTS
Hawaii stock experts are mixed on whether the major indexes can increase this year.
||1,310.70 Caris and Co.
||1,275.00 Dole Capital LLC
||1,225.00 FIM Group Ltd.
||1,370.00 Certified Financial Planner
||1,400.00 Hawaii Stocks and Options Group
||1,179.63 The Yamamoto Forecast
|June 30, 2006 close