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Bearish financial news dogged managers, advisers and others who were in Chicago for Morningstar's annual mutual fund convention, which ended June 27. Shares had crumbled 3% the day before, putting the major stock indexes on the cusp of bear-market territory and confirming that the down trend that began last October is no run-of-the-mill correction.
It was all a bit scary because I heard echoes of the 2002 Morningstar conference, which I also attended. During that year's confab, WorldCom confessed it had falsified its cash flow and earnings by billions and would probably go bankrupt. Stocks plunged nearly 2% on the second day of the conference, followed by a terrifying dive that slashed the Dow Jones industrial average from 9286 on June 24 to 7702 on July 23 -- a 17% plunge in one month.
I'm not going to forecast that the Dow will now repeat that terrifying 2002 fall, which would send the average below 10,000 by baseball's All-Star break. But the vibes I carried away from three days among Morningstar's guest list of esteemed mutual fund managers and financial advisers wasn't encouraging.
The money managers are optimistic, all right, with some even venturing that a year or two from now, you and I will remember the summer of '08 as a splendid time to be an investor-if somehow you still have money to invest.
It was the financial advisers I chatted up who gave me pause. They are recommending to maintain a defensive posture until the market's wildness settles down (and they don't see that happening anytime soon). Charles Tarara, an independent adviser from Minneapolis-St. Paul, related how he had intervened when he saw a client essentially betting his retirement on comnpany stock that had done well but was overrepresented in his portfolio. "I saved his [posterior]," he said. His was a lesson in prudence and diversification.
Tarara's approach makes sense in this environment. Again, consider the parallels between 2002 and 2008. In 2002, the summer of losses owed most of its severity to accounting fraud. Wall Street traders made everyone pay that year for executive-suite misconduct.
The trouble in 2008 is out-of-control oil prices, sweeping nervousness about the condition of banks, and the realization that inflation and interest rates are as low as they'll be for some time to come. That is a worse threat to the well-being of investors' nest eggs than the death of such corporate sinners as WorldCom and Enron.
Also, in 2002 you could dodge the stock market's worst problems by buying real estate investment trusts and energy investments. Today, real estate looks risky (with some niche exceptions) and energy shares may be too high to buy.
You can go to Morningstar's Web site and read what stocks some of the speakers recommended from the dais. But a lot of the real insights took form away from the main stage. Here are some of my takeaways.
1. Buy municipal bonds. Trust me. I'll say it again: Buy muni bonds. The reason is that the tax-exempt bond market is not only abolishing bond insurance but also the very ratings system that dragooned cities, counties and states into paying for insurance to get a triple-A rating for an issue instead of, say, an A-. Soon 48 states, many cities and counties, and almost every essential-service agency (water and sewer, public hospitals, toll highways) will be regarded as AAA, says Tim McGregor, a municipal-fund manager for Northern Trust.
Essentially, there will be two muni-bond ratings: triple-A and non-investment-grade. Today, a ten-year AAA tax-free bond yields you 3.79%, while a ten-year Treasury note pays 3.97%. A ten-year single-A-rated municipal offers 3.81%, so close to a triple-A yield that, in effect, the bond market has abolished the distinction. Yet, looking ahead, with taxes likely to rise, that tax-free 3.79% could be the equivalent of more than 6% this time next year. This is my safest investment idea.
2. Be wary of buying opportunities touted by some longtime fund managers. Bill Nygren was manager or co-manager of the Oakmark fund during its salad days but has tossed four lemon years out of the past five. He told a standing roundtable of advisers and journalists that he sees "great value in everything except commodities and weak dollar plays." He also said he expects a big drop in oil prices and with it a recovery in the dollar. That might bail out Oakmark's big holdings of bank stocks and consumer-spending names, such as Best Buy, but it didn't sound convincing to me.
POSTED BY: Andy G (July 02, 2008 10:47 PM)
Why doesn't anyone ever mention I Bonds. Currently paying 4.84%, guaranteed by the U.S Government and returning 5% average for the past 8 years. Free of city and state taxes and even free of Federal taxes if used for Educational purposes. Glad to have them in 25% of my portfolio.
POSTED BY: Ralph (July 08, 2008 10:49 AM)
The market if left alone can be a fine thing. Major players (such as Cramer) whom I do respect, make a statement and a stock rolls off the table i.e.Visa. Lets use this stock as an example. Mastercard a smaller player but more prevalent in Europe (for the time being) is raved about. Sure, most of the big money players (read fund managers) have made a killing off this stock. It has little downside since it processes credit and has no money of its own in a lending position....Visa is the larger of the two and is projected to produce a 15% increase over the next several years. It settled with Discover and AMEX and has changed its policy to avoid DOJ investigations. It is becoming strong in Asia and is starting to move in Europe. Why then are the shorts eating it up? Some say its is P/E being too high. I personally think the fund managers could not get in cheap enough and missed their chance to get in at the start, so they are keeping it low to allow a later entry without too much loss...It will take a while but soon Visa will catch a bottom, then what?
POSTED BY: Ken D. (July 16, 2008 12:52 PM)
Well written, reflecting the positive bias of most mutual fund managers. They tend to be just salesmen, drumming up business for their fund.
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