KIP AOKI / KAOKI@STARBULLETIN.COM Caught in Stock investors are between Iraq and a hard place these days.
the crossfire
The economy and Iraq are
throwing investors for a loopBy Dave Segal
dsegal@starbulletin.comOn one side, there's the Battle for Baghdad. On the other, a U.S. economy that can't seem to shake off its lethargy.
Caught in the middle are American investors, who are trying to decide whether they should stay on the sidelines, nibble at some stocks, or empty their wallets.
So how does an investor deal with the crossfire?
"This is not really a good time to bet the ranch," advised Paul Loo, senior vice president of financial services firm Morgan Stanley in Honolulu. "But because we're closer to the conclusion of this war, have such dominant and effective forces, and are decimating the outer perimeters of the city, along with good news like the releasing of that (POW) woman (by U.S. commandos), I'm beginning to nibble at a couple of stocks."
Since the United States dropped its first bombs on Iraq March 19, the stock market has rallied, sold off and rallied again while digesting news from the front. Lately, the major indexes seem to be holding their positions while awaiting the outcome in Baghdad.
On top of that, throw into the mix the beginning of first- quarter earnings season and the accompanying second-quarter earnings guidance, and there are plenty of reasons for investors to retreat to their bunkers.
"(We're just beginning) the Battle for Baghdad and I don't know how it's going to go," Loo said. "I have a suspicion we're going to win. Then the unknown part is that we are going to have unfortunately killed a lot of bystanders, and we are going to build a government and have the populace follow us and the new government. That's really the $64,000 question, and the market is going to kind of want to see that."
Despite the uncertainty, though, major indexes have held up well since the start of the year. The Dow Jones industrial average is down 0.8 percent and the Standard & Poor's 500 index is off 0.1 percent while the Nasdaq composite index is up 3.6 percent. Since the start of the war the three indexes are all virtually flat.
However, portfolio manager Barry Hyman isn't convinced that stocks are merely marking time before making a sustainable push higher. Even though he admits there probably will be a postwar rally, he said it will be short-lived because he feels that most U.S. stocks are still overvalued.
"In the short term, there is a good chance that investors will optimistically jump right back into the stocks that have burned them so badly over the past three years, including large cap and technology stocks," said Hyman, vice president of Financial & Investment Management Group Ltd. in Wailuku, Maui. "I believe investors have not yet learned their lesson. Just as we saw blind optimism rally the market just prior to the war in mid-March, only to be followed by some of the air being let out at the end of the month, we believe that the same should happen after any relief rally that comes with the end of the war."
In fact, data from Ned Davis Research back him up. Even though there is a higher degree of bullishness among market experts now than there was during the 1991 Persian Gulf War, that's actually a negative signal since increased bullishness is considered a contrarian indicator. The rationale is that the more people who are bullish, the greater the likelihood that they've already invested in the market. Thus, there is theoretically less available cash on the sidelines with which to fuel a sustainable rally.
A recent Ned Davis Research poll of Wall Street strategists found that 62.8 percent of them are bullish compared with 46.5 percent in 1991.
Similarly, a recent survey by technical analysis firm Investors Intelligence discovered that 46.6 percent of investment advisers are bullish, 35.2 percent bearish and 18.2 percent neutral compared with 33.6 percent bullish, 54.1 percent bearish and 12.3 percent neutral in 1991.
"Investors seem to think that because the market began a nine-year rally after the 1991 war, something similar will happen again," Hyman said. "But the economy is still in bad shape and most U.S. stocks are still overvalued."
Ned Davis Research, calculating its price/earnings ratio by using the actual earnings of companies' last three quarters and the estimated earnings of the current quarter, noted that the P/E for the Standard & Poor's 500 is 27.7 today compared with 15.5 in 1991. It also found that credit market debt, which would include liabilities such as mortgages, is $31.7 trillion today compared with $13.8 trillion in 1991.
Those types of numbers have led Hyman to mostly steer clear of U.S. stocks.
"We are avoiding large cap U.S. stocks as a rule and investing in corporate high-grade and high-yield bonds as well as convertible bonds, high-income paying preferred stocks and high-income paying common stocks," Hyman said. "Most of the undervalued high-income stocks we are able to find are in markets in Asia and Europe. Therefore, we have pretty low exposure to U.S. equities."
Dwight Melton, president of the Patience and Discipline Investment Club, bases his investment decisions on technicals and fundamentals of the market and of individual stocks. For less-experienced investors, he recommends sticking to the major indexes during this time of uncertainty.
"A more moderate investor probably should stick to the major indices in making selections, something like the exchanged-traded funds -- the SPDRs (ticker: SPY) and the Nasdaq triple Qs (ticker: QQQ)," said Melton, who's also a director with the National Association of Investors Corp., a nonprofit investment education organization. "That way, the investor isn't restricted to the market risk in individual stocks."
Melton, who recently retired after 26 years in the Marine Corps, said there are a lot of outside influences affecting the market right now.
"The Iraq situation is one of the geopolitical issues going on right now," he said. "There is also Afghanistan in the backdrop, as well as North Korea. Throw in the whole geotourism thing, and all of these are factors that contribute to the overall market environment. As long as you have uncertainty going forward, that's going to put a drag on the market."
The 71-year-old Loo, who's been investing for nearly a half-century, said the rapidly changing world has made him rethink his investment strategy.
"With today's changing world, you have to be more nimble," Loo said. "Before, you could buy McDonald's and hold it and buy Xerox and hold it. But that's not so true anymore. Change takes place so rapidly and is ever changing, and if there's anything to be learned by investors, it's to select a counselor and not do it themselves."
Loo said he recently began nibbling at Central Pacific Bank parent CPB Inc. after it fell to $25 from $31 and also began buying shares of Quiksilver Inc., a manufacturer and distributor of casual sportswear, snowboardwear and swimwear for young men and young women. Loo likes CPB because of its current valuation and was intrigued with Quiksilver because it has formed a joint venture to open retail outlets in Shanghai, China; Beijing and Hong Kong.
"Being a good investor is just not finding out who's buying what because people tend to buy what they read in magazines, like Money magazine," Loo said. "People who read advice anywhere really need an individual consultant, and that's what I've always felt in my 44 years of investing. Reading magazines and watching Morningstar raise funds to five stars from three stars is not simply the way to do it because you can buy a stock which may not be suited for you. What do you do about selling it if tomorrow something happens? You need someone to guide you and, even then, both of you can be wrong. But at least you have a doctor there and not a nonprescription drug."
