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Extra
Why it pays to bet against a sure thing
Rising interest rates, a falling dollar and a plunge in the overvalued tech sector seem to be foregone conclusions this year. What if the prognosticators are wrong?
By James B. Stewart
Ive never thought of myself as a contrarian investor, but I still find some merit in the contrarian philosophy. If everyone already knows something, that knowledge will be fully reflected in stock prices. There's little money to be made in following the herd. But unlike many contrarians, I also recognize that there's plenty of money to be lost by going against the herd when the herd turns out to be right.
But many people purport to know things to a certainty that simply can't be known, such as what the future holds. Then there often is money to be made in taking a contrarian view. I have been struck lately by how widespread the consensus about some key economic issues seems to be this year.
Since all of the issues turn on future performance, I'd at least consider the possibility that something else will happen, as so often happens in markets. Here are three shibboleths for 2004 that almost no one seems willing to argue against.
Rising interest rates
Interest rates are going to rise. I've certainly been in this camp for the past year, and interest rates have risen. Interest rates on 10-year Treasurys are nearly a percentage point off their lows of last year, and the bond market experienced a historic sell-off last summer. But with virtually everyone betting that interest rates will rise further, maybe now isn't such a bad time to consider some longer-term bonds.
Obviously at some point the Fed will raise rates, but I'd consider at least the possibility it will be later than most are now predicting, and that the effect on longer-term rates will be modest. I wouldn't go overboard, but I expect to modestly increase my interest-rate exposure over the next few months.
The falling dollar
The dollar will weaken further. The dollar has been in a serious slide for over a year, as anyone knows who has traveled to Europe recently. Economists blame ballooning U.S. deficits and note that currency trends, once established, are slow to reverse themselves. All true. This has led investors into stocks of foreign companies and mutual funds, which convert their local currency earnings into dollars, and to U.S. manufacturers who sell to foreign markets in what are now cheaper dollars. The value of commodities such as gold is also denominated in dollars.
But let's assume the unthinkable: The dollar strengthens. In that case, you'll have wanted to take a few profits in those areas, where prices already reflect the effect of a weak dollar. Put the proceeds into U.S. companies with healthy domestic markets.
An overvalued tech sector
Tech stocks are overvalued. 2004 has already proved this to be wrong, with techs once again outpacing the broad market in the first week of the year. So much for conventional wisdom. I agree that tech stocks like eBay (EBAY, news, msgs) and Nortel (NT, news, msgs) are pretty richly valued, but as usual I prefer to make no predictions. They won't prove to be overvalued if tech spending takes off and profits rise.
While I've recently taken some profits in the tech sector, and plan to take more if the rally continues, I still have considerable holdings in technology and wouldn't dream of having no exposure to the most dynamic sector of the U.S. economy.
Speaking of taking profits, the Nasdaq ($COMPX) is nearing my next selling threshold of 2,150. It has been a long time since I've experienced four straight selling opportunities without an intervening correction, but here we are. It's good to be prepared by looking at opportunities to sell covered calls or to sell some stocks outright. I'd start by looking at my positions with the biggest gains, which should dovetail nicely with any portfolio rebalancing that might now be in order.
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