The recent sharp decline in short-term interest rates is very bullish for stocks, observes Personal Finance newsletter (P.O. Box 3808, McLean, VA 22103). "In the past 20 years, short-term rates have fallen this fast only eight other times. In the five months following those drops, the S&P 500 advanced more than 11 percent on average, an annualized rate of nearly 30 percent."
Buying efficient companies cheap has allowed Muhlenkamp Fund to produce 19.1 percent average annual returns over the past 10 years. Muhlenkamp looks for higher than average returns on equity, ROEs that are also higher than their stock's price-earnings ratio. It holds its stocks an average of 10 years, making it very friendly to tax-wary investors. Recent favorites: Merrill Lynch, Calpine, Morgan Stanley Dean Witter, Ford, Arkansas Best.
After 14 years of defense budget cuts, the United States is in its third year of defense budget increases. The Turnaround Letter (225 Friend St., Boston, MA 02114) thinks there are still investment opportunities among some of the better-known defense stocks. "Many are cheap, and some have good balance sheets." Big-cap defense stocks that TL thinks merit consideration are Raytheon, General Dynamics, Northrop Grumman and Boeing. In the mid-cap range, the newsletter likes Litton Industries. Among small-caps, it favors Applied Signal Technology, FLIR and Kaman.
Short interest — the number of shares sold on the expectation that they can be repurchased later at lower prices — has recently risen sharply for the following seven stocks. But analysts tracked by IBES International expect all of them, which sell for below-market multiples of 2001 profits, to post earnings gains averaging 25 percent or more this year: Alpharma, Bally Total Fitness, Orthodontic Centers of America, Owens & Minor, Pre-Paid Legal Services, Western Gas Resources, Yankee Candle.
Corporate debt stands at a record high compared to national financial output. There's a wide gap — the so-called financing gap — between what corporations earn and what they invest. The shadows cast by this debt mountain falls heavily on the bond market. Hence, the surge in past-due loans and junk bond defaults. The investment prescription, according to Hoisington Investment Management www.hoisingtonmgt.com: "Prepare for a longer and deeper recession than the consensus expects. Buy Treasurys."
Value investing has come back into fashion during this dodgy stock market. The S&P Barra 500 Value index has returned 4 percent since October 2000 vs. the S&P 500's 5 percent loss. But many value-oriented stock funds have done even better. According to Lipper Analytical, these five no-load value funds have averaged 19 percent returns over the same period: American Century Small Cap Value, Berger Mid Cap Value, Clover Small Cap Value, Dreyfus Midcap Value, Wasatch Small Cap Value.
The U.S. dollar could be under heavy pressure in coming months, predicts The Personal Capitalist newsletter (6911 S. 66th East Ave., Tulsa, OK 74133). "The slowing economy, combined with excess dollars in circulation and a large balance-of-payments deficit, will cause the greenback to lose ground. As this occurs, we could see foreigners pull out of U.S. stocks and bonds, further weakening the economy. A weakened dollar will also contribute to already mounting inflationary pressures."
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.