Issue #6 - 2/27/08
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"Inflation is taxation without legislation."
Milton Friedman (1912-2006) American Nobel Laureate Economist
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See Note below for chart explanation.
Editor's Corner
Inflation or Stagflation? That Is the Question.
Ron Rowland - Editor
Equity markets marched forward this past week. The S&P 500 is once again approaching the 1400 level, an area that provided resistance a few weeks ago and halted a promising rally off the January lows. The advance this week came despite a slew of seemingly negative economic reports. Consumer confidence dropped to a 17-year low, and the PPI jumped to 7.4%, the highest it has been since 1981. Additionally, to no one's surprise, home prices declined again amid weakening sales figures. The economic reports are starting to indicate that stagflation may already be upon us.
Today, Ben Bernanke is in his first of two days of speeches of what was formerly known as the semi-annual Humphrey-Hawkins testimony to Congress. In today's speech before the House, he reiterated that the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." This suggests that further rate cuts are possible and confirms that inflation control is definitely a lower priority for the Fed at this time.
Sectors
There is a very large dispersion in sector performance. Looking at the extremes, we have Materials performing the best and Telecommunications performing the worst. Our RSM calculations currently show that Materials has an intermediate trend of +39% per year while Telecommunications is declining at -67% per year. The difference between them is 106%, which is one method of measuring sector dispersion, or spread. Large dispersions such as this are seldom sustainable for any significant period. In other words, dispersion is subject to "reversion to the mean." Therefore, we would expect this spread to narrow over the next few weeks. Market strength currently resides with the commodity-oriented sectors.
Styles
All sections of the style box remained in negative territory this past week, and Mid-Cap Growth continued to hold the top spot. Unlike the extreme spread among the sectors, the various style categories are exhibiting a rather normal level of dispersion. However, if you were to review the charts of the style components you would quickly notice a difference between Mid-Cap Growth and the others. Mid-Cap Growth has been making a series of higher highs and lower lows the past few weeks, which is an indication that a new upward trend could be taking shape.
International
Latin America, primarily on the strength of Brazil, surged last week and is now on the verge of breaking out to new highs. The overall hue of our rankings improved this week with Canada and Emerging Markets joining Latin America on the positive side. Similar to the strength we see in the sector categories, the strength in the global categories tends to reside with the commodity-oriented regions.
Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
Pick(s) of the Week
Long Term Funds for Your IRA:
MXXIX, YACKX, DIM
John Schloegel
The good folks at Forbes.com today asked us for some ideas for long term investing. We are always happy to oblige. This exercise allows us to step back and to take a view of the "big picture." As growth minded individuals, we took the opportunity to package a three security portfolio that would give us terrific odds at a successful outcome on a global basis. Our consideration moved us to recommend a growth fund, a value fund, and an international fund. We wanted exposure to broad asset classes, low correlation, go-anywhere type managers, who were experienced operators, and had low fees. We are extremely pleased with the outcome. I've included the text of exactly what was forwarded to Forbes today. I hope you enjoy.
Marsico 21st Century Fund ( MXXIX)
MXXIX is an aggressive growth no-load mutual fund. It's a go anywhere type fund, and typically holds between 35 and 50 securities. It has a top quartile ranking from Lipper in 1, 3, and 5 year time periods, with a 21.3% annual rate of return for the five years ended January 31, 2008. This compares favorably to the S&P 500 annual return of 12.0% in the same time period.
Yacktman Fund (YACKX)
Lead managers, Don and Stephen Yacktman, are classic value-type investors. They like to wait for the market to come to them and typically don't chase stocks. This fund is an ideal candidate for the value component of your portfolio. The benefit with YACKX is bear market and downside protection. For example, this fund was up 11.4% in 2002 when the S&P 500 was down --22.1% that year. In the past six months through Jan 31, 2008, this fund was in the top 5% of all funds in its category. That's the type of performance you want in difficult environments!
WisdomTree International MidCap Dividend Fund (DIM)
DIM is one of a smorgasbord of offerings from the fairly new WisdomTree family of ETFs. There are two key benefits of DIM. Number 1: Its unique focus on international dividend paying stocks, ideally positioned between large and small stocks. Number 2: DIM is screened by a fundamental overlay that focuses on earnings and dividends. It's not a pure market cap schematic. This fund has a low expense ratio of 0.58%, and has a cumulative return of 27.9% since inception (06/16/06), versus the MSCI EAFE benchmark of 21.6% in the same time period thru Jan 31, 2008.
Note:
Keep in mind that the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.
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DISCLOSURE
© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
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