TIME TO SELL RISK ASSETS, BUY A LITTLE GOLD ? / BARRON´S MAGAZINE

Read This, Spike That

Time to Sell Risk Assets, Buy a Little Gold?

Should investors run away from junk bonds and tech stocks? Is the yellow metal finally a buy?

By John Kimelman           

July 22, 2015 6:24 p.m. ET

 

Wednesday’s stock-market decline notwithstanding, U.S. investors mostly appear to be in a “risk on” mood these days, embracing stocks and shunning that great disaster hedge – gold.

So it’s worth noting that some financial journalists are beginning to challenge that thinking.

I’ll look at a piece by one respected blogger that urges caution with tech stocks and another piece in The Wall Street Journal that discusses the idea of shorting junk bond funds.

And we’re starting to see pieces that argue that it’s time to wade back into gold, which has lost roughly 6% of its value in 10 straight days of losses amid talk of “capitulation.”

If you read this Website, Barron’s magazine and other financial organs, you’ve likely read that many investors feel that today’s technology sector is on far more solid footing than the tech sector of 15 years ago. To be sure, the valuations of the Nasdaq on the eve of the tech crash of 2000 dwarf the more subdued and reasonable levels of today. And tech CEOs have presumably learned a few lessons along the way.

But writing on his well-followed Humble Student of the Markets blog, writer Cam Hui argues that investors should be very leery of those who are cheerleaders for technology and other growth-related sectors.

As far as he is concerned, technology and other growth-oriented stocks are overextended.

Even setting aside the unfriendly market reception to the earnings reports of Apple, Microsoft and Yahoo!, Hui argues that growth and momentum stocks appear to be extended. As proof, he points to a ratio showing the relative performance of the Russell 1000 Growth Index versus the Russell 1000 Value Index. “This ratio has gone straight up in the past few days. Even if you are bullish on growth stocks, do you want to be chasing them here?’”

 

In a similar vein, a piece in The Wall Street Journal questions the flood of investor dollars in junk debt and other risk assets.

 

The article points out that some hedge funds are seeking to short junk bond funds with the help of credit-default swaps, a form of credit insurance that was used by prescient hedgies to short the housing market on the eve of the financial crisis.

 

As WSJ writer Rob Copeland states, hedge-fund shop Apollo has been raising money from wealthy investors for a hedge fund that snaps up credit-default swaps that benefit if the junk bonds fall.

 

As the story points out, influential activist investor Carl Icahn brought the issue to the fore last week, saying at an investment conference that he feared a bubble was expanding in junk bonds thanks to the rush into high-yield exchange-traded funds run by companies like BlackRock.

 

For investors intrigued by this “short the junk bond market,” trade, the Journal points that there are ways to play it without having to pay big fees to a short-oriented hedge fund. For example, an investor can simply buy a put option on a junk-bond ETF.

 

While I am leery of articles that urge investors to short any asset, this article at least offers a low-cost way to pull it off.

 

Few are talking about shorting gold these days. That’s because the price of the metal has come down so hard and fast in recent months. On Wednesday, gold futures logged their 10th straight session of losses.

 

At a price of roughly $1,093 an ounce, many are beginning to wonder whether the investors are finally capitulating or throwing in the towel, setting the stage for a comeback in the metal’s price.

 

Barrons.com’s technical analyst, Michael Kahn, suggests as much in a Monday column, though he shied away from saying that the metal was a buy at this point.

 

Other commentators, however, are more bullish about gold.

 

Writing on his Felder Report blog, Jesse Felder argues that gold looks like a buy now, particularly among the mining stocks which have fallen harder than the metal itself.

 

“They say the best time to buy is when there’s blood in the streets,” writes Felder. “At minus 22%, the 5-year average annual return for the Philadelphia Gold/Silver index has never been so poor. This is exactly what ‘blood in the streets’ looks like.”