Time to go Long on the Dollar, Oil or Gold?
Wednesday, April 2, 2008 | Teeka TiwariRating:
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On today's call:
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- Find out whether yesterday's financial-led rally signals the start of a turnaround
- Get the real story behind the UBS $19B write-down
- Hear which four sectors are currently offering a low-risk buying opportunity - especially for longer-term investors
- Plus, a surprise story from Teeka's past ...
Our friends over at TickerHound.com have created a place where everyday people can go and get their financial questions answered by other Tickerhound.com members. This week, I wanted to take the time to answer a few questions myself that have been posted on their site.
Q. Passive index or active fund?
I'm starting monthly payments to dollar-cost average into the market over time. Because of broker commissions for stocks & ETFs (1-2% in the UK), the only cost effective way of doing this seems to be through funds.
Question: Do I invest in passive index trackers or managed funds (both with no front load)? Many seem to argue that active funds do not beat the index over the long-term; however doing the comparisons myself it is clear that some do beat the index over 5 year periods, even with expenses taken into account. However, do you think a fund can really beat the index over the long-long term (15-20 years)? I suspect that a fund which outperforms for 5 years may just be followed by a period of under performance, merely averaging it out.
Secondly, do managed funds offer more value for investing in emerging markets than in mature ones? My theory is that in an 'efficient' market like the USA, most knowledge is already out there, whereas for emerging ones a manager's skill is worth more.
A. In my opinion, if you are dollar cost averaging over the long term you do not want to use an actively managed product. For the passive investor, index investing is the way to go. To really put the compounding power of long term dollar cost averaging to work, you can enact the following strategy. Own 5 separate no load index funds that cover big cap growth, small cap growth, big cap value, small cap value and an international index.
Vanguard is just one of many companies that offer various funds tied to this dollar cost averaging approach. Have you thought about opening an account with a US broker? At the equivalent of about 10 quid a trade, it’s a heck of a lot cheaper than paying 1%-2%.
In fact, if you are paying 1%-2% in transaction fees you are KILLING your long term compounded rates of return.
Q. Do you think it is time to be long on US Dollar? I think so? We are near a bottom?
Once credit market becomes normal and started to increase interest rate to control inflation Anything goes down badly will go up. There will be turnaround sooner than later.Top investors not always correct. Contrarian indicators, too much speculation against US Dollar by new comers including every Harry, Dick and Tom. Some suggesting to diversify into Euro? There is not enough liquidity to meet Euro Demand.
Due to above reasons I think US Dollar will appreciate in the future. Do you think so?
A. This is an excellent question. The first thing to remember is that bear markets can sometimes last a generation (think Japan)! I am not suggesting that is the case here. The other thing to remember is that in an overall bear trend, a security can experience pretty meaningful rallies while still in a bear market.
You are correct in assuming that once the banks have stabilized, the Fed will switch their focus to inflation. The question is: will any potential Fed rate raises spark a dollar rally or merely blunt the dollars slide? So long as we engage in deficit spending, I believe it will be the latter.
What would get me very bullish on the dollar, though, is if we enacted a policy of ending deficit spending. Should that occur, it would have far reaching bullish implications for the US Dollar.
Q. Is this just a "feel good" rally or are we finally making a turn for the better?
Market looks strong today - is this going to last?
A. This is another great question, and I am sure that many investors are asking themselves the same thing. The key difference with Tuesday’s rally is that we rallied in the face of horrible news from UBS. UBS (a huge Swiss bank) announced that they will be raising an additional $15bn, as well as writing down $19bn in bad real estate holdings. Previously, such announcements have been met with a rash of selling.
What we saw on Tuesday was a very bullish divergence, bad news being met with a rally. To my eyes, this looks like a turn for the better.
Q. When can we expect a default crisis in the credit card industry?
A. Default rates are on the rise, and the recent Visa IPO smacks of a company looking to get the best valuation they can before a full fledged crisis hits. The key with the depth and breadth of any credit card fall out will be the job market. So far, employment has been stunningly strong given the slowdown in overall US business activity. But the employment numbers are lagging indicators. What I like to follow are the weekly continued claims numbers. If we are seeing continued unemployment claims rise each week, it’s a very good sign of more pain to come for the consumer credit guys.
In fact, if you look at the top 100 short interest stocks on the NYSE right now, about 80% of them are consumer related. The one caveat is that much of this slowdown has already been priced into the consumer cyclical space and to get a second leg lower, which is what you would need to profit from the short side at this level, you would have to believe that the economy is going to get far, far worse.
For me personally, I do not see that happening at this time.
Q. Are gold and oil being pushed to artificially high levels in the short term?
I heard that there was now more gold held through ETFs than there was held by central banks. Does this suggest that gold is moving too far too fast (note the large $40 jump toward the end of this week) and is this a contrarian indicator? I realize there are real supply/demand drivers pushing gold upwards (e.g S.Africa), but I am concerned that these current prices are being at least partly driven by a fad rather than pure fundamentals. From a contrarian perspective, it is interesting how 'in vogue' gold investing is right now. I heard it suggested that the moves higher by gold and oil is being driven by money that has left equities and now needs a 'home'. When equities begin to show strength, will this hot money leave oil and gold and push them back down? I am looking for pullbacks in oil and gold before investing further. For oil I am looking for US$80 later in 2008 and for gold I want to wait until I see it pull back by US$50-60. Any thoughts?
A. Gold prices have certainly benefited greatly from market related fears and South Africa’s energy issues. Remember that in a long term bull move (and it is my opinion that gold is experiencing a long term bull market), you can and will have fairly steep pullbacks. As Indian and Chinese wealth grows along with worldwide inflation, we will see the price of gold reach levels that it has never seen before (on an inflation adjusted basis). So to say I am a bull on gold is an understatement! If oil hits $80 (and I am not so sure it will), I will be buying it with both hands! The rest of the world has finally got a taste of the good life through the benefits of industrialization. That genie is out of the bottle and it isn’t going back in. As such, the demand for energy will continue at a torrid rate for many more years to come.
That's all I have time for this week, but please keep your questions coming!
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
