http://www.bloomberg.com/apps/news?pid=20601039&refer=bondheads&sid=a1tD.fryqNBQ
Confessions of a Money Manager With Nowhere to
Go: David Pauly
Commentary by David Pauly
July 1 (Bloomberg) -- Dear shareholders of the Sophocles Value
Fund:
Sorry to tell you this -- but I'm stumped. There's no place I
can invest your money today without appearing reckless.
Stocks, measured by the Standard & Poor's 500 Index, are
down 13 percent so far this year. ``Super-safe'' Treasury
securities lost 2.1 percent in the second quarter, even counting
interest payments, according to an index compiled by Merrill Lynch
& Co.
Prudent investors are supposed to buy both equities and bonds
because one market should go up when the other goes down. So much
for conventional wisdom.
Stocks are a minefield. Banks and Wall Street firms with their
ever-growing subprime mortgage losses are only the beginning.
Profits generally are slumping. The U.S. is either in a recession
or will be after Americans spend their tax rebates.
On top of that, we have a rising inflation rate. In the last 12
months, the Consumer Price Index has climbed 4.2 percent. It's not
just oil and gasoline.
The price of steel sheet, the kind used in cars and appliances,
hit a record $1,052 a ton in June, up 3.1 percent from the previous
high in May, according to Purchasing magazine. U.S. steel producers
are passing on their rising raw-material costs, and the weak dollar
limits import competition.
Worsening inflation is a killer for bonds. The Federal Reserve
has made it clear that it soon will start raising interest rates to
combat higher prices. Treasuries and all other bonds will drop
commensurately.
Best Bet
At the start of the year, we figured oil stocks would be a
no-brainer. Somebody had to benefit from the record price of crude
oil. We couldn't have been more wrong. Our shares in Exxon Mobil Corp. have fallen
5.9 percent.
It seems oil-rich countries such as Venezuela and Russia are
taking a greater share of the production pie from companies like
Exxon Mobil, Royal Dutch Shell Plc and BP Plc. And profit margins
for refining oil are narrowing.
Out of desperation, we almost gave up our principles and bought
tobacco stocks. Ernie Nicker, our chief trader, pointed out that
addicts remain addicted in bad times as well as good. It was
fortunate that we resisted the temptation. Cigarette sales in one
big market, the U.K., have dropped 6 percent since England banned
smoking in public places a year ago, according to market research
firm Nielsen Co. Imperial Tobacco Group Plc
shares have declined 22 percent this year.
Risky Bet
I thought I had discovered a reasonable risk in General Motors
Corp. bonds due in 2033 and paying 8.375 percent interest. When I
looked, the bonds were trading at 59 cents on the dollar, yielding
more than 14 percent. You get your money back in a hurry. Then
Ernie reminded me that securities yield junk rates for a
reason.
More recently, we considered going into commodities futures --
along with the rest of the world. Too late. That opportunity seems
to have passed. Experts now fret that the parade in grains, metals,
and even oil may be ending. Yesterday, corn futures fell by the
daily limit in Chicago. Wheat prices dropped 5.8 percent the same
day. Farmers had planted more of both crops than expected -- no
surprise since prices have been so high.
The safest place for your money may be cash. That's not
satisfactory either. While it seems to maintain capital, the yield
of 1.6 percent doesn't come close to keeping up with inflation.
Warren
Buffett can get away with holding oodles of cash
but you wouldn't be happy if a mere mortal did it with your
money.
Nothing seems to work. Looking over my shoulder just now, Ernie
said, ``How about dandelion futures?'' Ernie is a great kidder.
(Signed) Imus Keepup
Fund manager
(David
Pauly is a Bloomberg News columnist. The opinions
expressed are his own.)
To contact the writer of this column: David Pauly in Normandy
Beach, New Jersey, at [email protected]
Last Updated: July 1, 2008 05:22 EDT