Short-term Treasury bills began yielding more than long-term Treasury bonds last August. Over the past 32 years such inversions have occurred just 12 times, observes Investech Research (2472 Birch Glen, Whitefish, MT 59937). "On average, a recession began within 9.5 months of each inversion. That would mean that the current economic slowdown is due to become a full-blown recession late this spring."
The economic slowdown only makes UBS Warburg's chief economic strategist Edward Kerschner feel more bullish. He believes that the presidential election, the e-stock meltdown and the Fed's interest rate cuts make this one of the five cheapest stock markets we've seen in the past 20 years. "Historically, the market has risen 40 percent in the 18 months following such levels of devaluation," says Kerschner. His favorite issues: Broadcom, Celestica, Citigroup, Delta Air Lines, JDS Uniphase, Jupiter Networks, Pfizer, Starwood Hotels, TMP Worldwide.
Railroad stocks have underperformed the general market for three consecutive years and were recently discounted by 45 percent to 65 percent to the market multiple. In the current "return to value," rail stocks remain among the best buys, says Burton Strauss, a transportation analyst at Dominick & Dominick. "Industry-wide, earnings are growing 8 percent to 10 percent, and stocks offer a 5 percent yield for 15 percent growth." Strauss' favorites: Burlington Northern Santa Fe, CSX, Norfolk Southern, Union Pacific.
Stocks priced under $10 are often shunned by professional money managers. Sometimes this creates opportunities for individual investors. According to IBES International, these seven cheapies have had exceptionally high per-share earnings growth over the past three years and recently traded for just five times this year's 2001 estimated earnings on average: Group 1 Automotive, Jakks Pacific, MTR Gaming Group, Navigant International, Sonic Automotive, Trans World Entertainment, US Concrete.
"The most important predictor of a bond fund's future performance is its expenses," says Alice Lowenstein, fixed-income editor of Morningstar Mutual Funds (225 W. Wacker Drive, Chicago, IL 60606). "Over time, even a few hundredths of a percentage point can make a big difference in your total return." Lowenstein suggests that income investors limit themselves to bond funds with expense ratios significantly below the 1.11 percent industry average.
Balanced funds are particularly attractive in this market environment, says Standard & Poor's Outlook (55 Water St., New York, NY 10041). "They generally underperform growth funds in rising markets but shine when stocks fall because their fixed-income components offer downside protection." The Outlook's favorites are six no-load funds that had positive returns last year vs. negative returns for their peers: Alleghany Chicago Balanced, Pax World Balanced, Leuthold Core Investment, Preferred Asset Allocation, Van Kampen Equity Income, Vanguard Asset Allocation.
An unpublished paper by Brad Barber and Terrance Odean, "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment," says that men are more overconfident investors than women. Surveying 35,000 accounts at a large discount brokerage from 1991 to 1997, Barber and Odean found that men trade 45 percent more than women. That trading reduces men's returns by 2.65 percentage points annually, vs. just 1.72 percentage points for women.
Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.