Jubak's Journal
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• 3 big trends will haunt Bernanke, 10/25/2005
• 5 tech stocks to buy before the rally, 10/21/2005
• 5 stocks not afraid of inflation's bite, 10/19/2005
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5 stocks for the post-Greenspan world
Until Fed-chief nominee Bernanke proves himself, the markets are in for a wild ride. But these safe-haven stocks will help steady any portfolio.
By Jim Jubak
The financial markets are going to test the new guy.
Ben Bernanke may indeed be the greatest thing since sliced bread -- or at least the best choice to follow Alan Greenspan at the Federal Reserve -- but until he proves his chops, investors should expect more wild swings in the stock and bond markets than under Greenspan. (Not that the market was so well behaved during his time at the Federal Reserve, mind you.)
Look at the first two days of the countdown to Greenspan's departure. On Monday, Oct. 24, the day President Bush nominated Bernanke, the stock market staged a 170-point rally, but the bond market marched resolutely in the other direction. Investors apparently decided, for the day at least, that Bernanke would be a less resolute inflation fighter than Greenspan. So a Bernanke Fed might be less likely to raise interest rates -- good for stocks -- and less effective at controlling inflation -- bad for bonds.
The next day, the stock market decided it had had enough excitement and simply marked time. But the bond market continued to sell off, unconvinced of Bernanke's commitment to fighting inflation despite all the talk about setting a target inflation rate at the Federal Reserve. The 10-year Treasury note fell in price, raising the yield to 4.53%.
And gold, the asset that investors like best when inflation worries rise, got into the act on Tuesday. Gold futures rose $7.70 to $474.70 an ounce on the New York Mercantile Exchange.
Things that go bump in the markets
The market could well -- and most probably will -- change its mind again tomorrow or the next day. As qualified as Bernanke is, he has never been chairman of the Federal Reserve, he's never had to balance growth and inflation, and he's never been at the helm as the Fed navigated the financial markets through a crisis. Until the man has built enough of a track record so that the markets can judge him, the financial markets will jump and jump high if they even imagine that someone is about to say Boo!
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More ups and downs mean tough times for high price-to-earnings ratio stocks, since their high multiples magnify every market dip into a market plummet. More ups and downs means sharp but brief one-day to two-week moves that then peter out or more confusingly reverse direction completely. And more ups and downs mean good times for safe-haven stocks that provide stability when volatility picks up.
On my regular weekly appearance on CNBC's "Morning Call," I picked three stocks that should do well in the increased volatility of a post-Greenspan market.
Glamis Gold (GLG, news, msgs). Investors buy gold when they're worried about inflation spiking out of control. They buy gold when the U.S. dollar starts to slip. They buy gold when market volatility kicks up. And they buy gold whenever they start to worry. All that will work in gold's favor during the shake-down tour of Ben Bernanke's Federal Reserve next year -- even if nothing in particular goes wrong. In this kind of pro-gold environment, I think the best gold stock to own is one that of a company that is increasing its production as gold prices rise. CIBC World Markets projects that gold production at Glamis Gold will climb by about 50% in 2006 from 2005 levels and that total cash cost of production will actually fall as production increases. Wall Street is projecting a 200% increase in earnings in 2006. Our StockScouter rates these shares a 4 out of a possible 10.
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