At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 10.15.04

What does it take for the markets to change the current course of sideways sliding as if stuck in an endless spin on ice? It takes, I'm afraid, a little bit of moxy combined with the ability to work against the markets themselves.

Far too often, investors and analysts believe that the markets are made honest by the presence of its participants. While the market moves on their whims, it is a hardly indicative of a truthful gauge of value. That's right, value.

Value investors, those tried and true nay sayers who are quick to point out that just because a stock appears to be worthwhile, doesn't make it so, have been the bottom feeders in a turbulent market. That turbulence has extended for over five years now as investors look for jumping in points, jumping out events, and any good reason to stay put.

The consummate long term investor, and with good company in the likes of Warren Buffet, is looking for more transparency that eliminates the chances of sudden disclosures and comes with reasonable pricing. Over the last five years, that has not been easy.

Market snapshots had value investors wondering if they had made the right choice, especially when the market ran itself up to those bubble highs in March of 2000. But continued volatility kept the markets in turmoil and overall returns during the next several years at barely break even. Value investors look for good pricing which simply means they search for stocks whose value is below what the overall market perceives it should be.

But funds who use this thinking to achieve good returns for their investors have been struggling to keep those fickle investors who jump ship at each new move in the market. These so-called tracking errors have cost investors the steady returns rewarded with a conservative style but better that the paltry 0.57% the S&P 500 index has provided during the years 1999 to 2003.

So what separates value funds from the rest of the market and why should you be very cautious when allocating your hard earned money to this group? Several reasons come to mind that require you to carefully chose when investing with value funds.

First and foremost is turnover. Nothing changes that ability of a fund to operate at peak efficiency than the constants fickle nature of the investor who flees at the slightest bit of negative information. This costs mutual funds in transaction fees as they chase, often without good reason, stocks that are stories rather than quality. As a whole, mutual funds average a turnover rate of 120% plus in 2003, the latest full year figure available. That means that the average equity fund holds a stock for ten months or less.

Value funds however, buy and hold for an average of five years, a true indication that these fund managers are not speculators. This virtually eliminates the problems that have plagued the rest of the industry concerning market timing and late trading to name a few.

The search for good quality stocks have forced many of the best value funds to close their doors to new investors while they sit on their cash waiting for opportunities. This also keeps the average value fund small in relation to the amount of stocks they hold. These all point to good long term prospects for their investors with the emphasis on the words long term.

At Arm's Length: 10.12.04

Pick one. Any one.

Or perhaps it is more than just one thing weighing on the economy, worrying Wall Street as they hope for the fourth quarter bounce and concerning investors to the point of disinterest. Add that to the numerous worries already circulating and you have the makings of a lot of trouble ahead.

No one can turn on the news or open a utility bill without seeing the long term and record setting costs of oil. Each step towards the next record eats away at GDP. At $50, the Gross Domestic Product was believed to be 3% on average. Nothing great but considering the pressure that oil has placed on the consumer, this is about right. But what if oil hit $60? Would the GDP fall below 2%? You can bet on it.

Some of this worry has now been evidenced in the lack of consumer borrowing. Coupling confidence with jobs numbers is problematic but the increase in consumer debt or more precisely, the cost of servicing that debt, has begun to concern the average citizen.

Add to that the mortgage rate increase, which by the way is still at significant historical lows of 5.82% for the thirty year, and you have the makings of a troubling trend working against growth.

Those ingredients, stirred gently by the Federal Reserve could stoke inflation. If that happens, the tightening that the Fed was attempting to do in measured steps might come to halt.

With all eyes on the stumbling state of job growth, the fixed income markets reacted in kind. With only 96,000 new jobs created and the previous month's total revised downward, bond yields fell moving as they do in the opposite direction of prices. Too many worries are on the minds of CEOs to see any real change in the near term. Job creation only creates health and pension problems, something a good many businesses are trying to grapple with alongside a growing concern about international security.

But almost everyone agrees, a pause by the Fed signifies that all of these worries, concerns and fears are well founded. So pick one and hang your investment hat on it. Chances are, you will be wise to have been worried.

The previous week's articles.

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