Opinion

John Wasik

A continental shift for euro zone investors

May 7, 2012 18:17 UTC

CHICAGO, May 7 (Reuters) – If this weekend’s elections in
France and Greece do nothing else then they should remind
investors that these are individual countries, despite being
members of the euro zone. The 17 current countries in the
currency bloc might have thrown in their lot together in an
economic sense, but for investing purposes, you don’t want to
treat the members – and surrounding countries that are waiting
to join – as a single entity.

I break up the continent into four distinct blocks that have
nothing to do with geography, but instead with economic risk
profile and political dynamics.

JUST LIKE US

I consider Portugal, Ireland, Italy, Greece and Spain to be
“Yankee” Europe. Although their fiscal problems are all slightly
different from each other, these countries all over-borrowed or
got nailed by a housing bubble, emulating American missteps.
Most have imposed devastating austerity measures that are
roiling their political systems and triggered double-digit
unemployment. Their short-term prognosis has been sour.

Investors have been selling shares of Yankee Europe of late.
Spain has led the list of losers with a 14.4 percent loss in the
iShares MSCI Spain Index Fund. Italy hasn’t been hit as
hard, with a 0.36 percent loss in the iShares MSCI Italy Index
exchange-traded fund. All returns are year-to-date
through April 30, compiled by Lipper, a Thomson Reuters company.

The one exception in the Yankee group could be Ireland,
where there’s a hint of a turnaround. The iShares MSCI Ireland
Capped Investable Index, rose 17.4 percent in the
period. Several Irish-based companies such as Elan, a
biotech firm, have growth prospects in global markets, so the
Emerald Isle is worth watching as a rebound candidate.

Is hot money heading the wrong way?

May 4, 2012 17:18 UTC

CHICAGO, May 4 (Reuters) – Troubles may dog the euro zone,
but in the U.S., stocks are on an ascent, with the S&P 500 up
about 12 percent in the first quarter. Apart from employment and
housing, there’s plenty of evidence that the U.S. is in a meek
recovery, which means that most of the hot money for short-term,
high-yield investments may be headed in the wrong direction.

Some $70 billion flowed into bond mutual and exchange-traded
funds from the start of the year through April 25, according to
Lipper, a Thomson Reuters company. That’s 10 times the amount
invested in large-company stock growth funds over those several
months, during which the exodus from stock funds was the largest
since 1996, according to EPFR Global. (More details here:).

This signals to me that either investors who were burned by
the 2008 financial crisis are still staying away from stocks, or
they don’t believe the stock rally is sustainable. That would
explain the continued retreat into corporate junk bond funds,
emerging market debt, U.S. mortgage securities,
intermediate-maturity bonds and all other forms of bonds.

Column: BRICs alone won’t build your portfolio’s foundation

Apr 30, 2012 15:40 UTC

CHICAGO (Reuters) – The worst advice on emerging markets is to go out and buy the best-performing funds or countries of last year. In most cases, the hot money has come and gone and you can’t buy yesterday’s gains. But you can invest in a wide basket of developing countries to build a more robust portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile. For global investors in the past decade, it’s been accepted wisdom that investing in the BRIC countries of Brazil, Russia, India and China is the basis of a strong strategy. While that’s still somewhat true, it’s not monolithic. Russia has had its setbacks and India is slowing down. China’s economy has increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the BRIC acronym a decade ago, suggests expanding your horizons to include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

BRICs alone won’t build your portfolio’s foundation

Apr 30, 2012 15:37 UTC

CHICAGO, APRIL 30 (Reuters) – The worst advice on emerging
markets is to go out and buy the best-performing funds or
countries of last year. In most cases, the hot money has come
and gone and you can’t buy yesterday’s gains. But you can invest
in a wide basket of developing countries to build a more robust
portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile.
For global investors in the past decade, it’s been accepted
wisdom that investing in the BRIC countries of Brazil, Russia,
India and China is the basis of a strong strategy. While that’s
still somewhat true, it’s not monolithic. Russia has had its
setbacks and India is slowing down. China’s economy has
increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs
Asset Management who coined the BRIC acronym a decade ago,
suggests expanding your horizons to include Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines,
South Korea, Turkey and Vietnam.

Finding ugly ducklings in a waddling market

Apr 27, 2012 17:07 UTC

CHICAGO, April 27 (Reuters) – Ugly duckling stocks are
surprises in small packages that turn into great performing
swans later on down the road. Nearly every large company started
out as a “small cap,” which generally refers to a stock with
under $1 billion in market capitalization. Most small companies
do unsexy things such as make pumps or generic drugs. You’ll
rarely hear them touted by big-name analysts or firms.

When business and economic cycles favor them, though, small
caps soar relative to big-cap stocks, especially because they
are usually priced at a bargain. Over the past three years
through April 25, for example, the Vanguard S&P 500 Fund
rose 19.4 percent. In contrast, the DFA US Small Cap
Value fund climbed 22.7 percent ().
Note: The DFA fund, representing an index of small companies,
is only available through investment advisers.

Long-term, exhibiting what investment analysts call “the
small company effect,” these pint-sized stocks produced a
compound annual growth rate of almost 12 percent from 1925
through 2011, according to Ibbotson Associates’ 2012 Classic
Yearbook (). That compares to
about 10 percent for the S&P 500 index of large stocks,
typically over $2 billion, and about 6 percent for long-term
government bonds. Small caps are generally stocks from $300
million to $2 billion in market capitalization; mid-caps from $2
billion to $10 billion; and large caps from $10 billion on up.
Much of the small-company/value effect has been documented by
academics Kenneth French, Eugene Fama and Rolf Banz
().

COLUMN: Five cautions for Apple stock enthusiasts

Apr 24, 2012 14:25 UTC

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel (INTC.O: Quote, Profile, Research), Cisco (CSCO.O: Quote, Profile, Research), Microsoft (MSFT.O: Quote, Profile, Research), etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

Five cautions for Apple stock enthusiasts

Apr 23, 2012 17:49 UTC

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel, Cisco, Microsoft, etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

Unsinkable ways to avoid a Titanic portfolio

Apr 20, 2012 15:21 UTC

CHICAGO, April 20 (Reuters) – By now you’re probably seasick
of hearing about the 100th anniversary of the Titanic tragedy
and the myriad analyses of why it sunk and what it means. Yet
for some of us who felt compelled to see the James Cameron movie
again – and got suckered into paying for a disappointing 3D -
we’re still looking for metaphors and analogies.

Few Titanic buffs look at how J.P. Morgan, the principal
investor in the Titanic, fared after the disaster in 1912.
Morgan was a financial emperor at the time, controlling the
Titanic’s parent company, White Star Line, as part of an attempt
to monopolize North Atlantic shipping through a trust of other
shippers he owned.

Morgan set up the White Star Line as a British-crewed
company to side-step U.S. antitrust laws. The banker, who had
canceled his trip aboard the Titanic, died in 1913. (It was said
that the ship was doomed by the ghosts of the eight Irish men
who died building it, according to my wife, who grew up a few
blocks away from where the ship was built in Belfast).

What’s on your investing bucket list?

Apr 16, 2012 18:05 UTC

CHICAGO, April 16 (Reuters) – Got travel or mountain
climbing on your bucket list? How about taking up the guitar? If
you really want to live life to the fullest in your remaining
days, then what you should also add to those goals is a list of
your investment priorities and adjusting your risk accordingly.

This idea doesn’t come from a cheesy Hollywood movie, but
rather from the study of behavioral portfolio theory put forward
by Nobel Prize-winner Harry Markowitz and leading behavioral
economics expert and finance professor and author Meir Statman
(). They theorize that if investors
divide their portfolios into mental account layers measured by
risk, they can counter nervous investment errors.

This is how it works: let’s say you have a $1 million
portfolio. You can divide it up into different-sized buckets
with goals for items like college savings and retirement. For
example:

Don’t do the portfolio tango on Spanish concerns

Apr 13, 2012 15:04 UTC

CHICAGO, April 13 (Reuters) – The rain in Spain will only
cause you pain. So goes the latest worry about Spain’s current
financial woes for international investors. Yet that may not be
the case if you’re truly a global investor and look at the
larger picture in the United States and abroad.

I’m not discounting that Spain’s banks and bonds won’t be
pummeled more as the country limps through the aftermath of a
housing bust and deleveraging. It’s still a good idea to stay
away from big Spanish banks such as Santander or BBVA
and funds that hold Spanish-based and other
beleaguered euro zone companies and bonds.

Spain once looked like the toreador of Europe with robust
housing, financial and export growth. When I was last there in
2007, cranes dominated the skyline of Madrid, the heart of the
old city was being spruced up and a new high-speed rail system
linked major cities. The country appeared confident and buoyant.

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