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Financial strategist advises against 'following the herd' when investing

Posted: Wednesday, November 03, 2010

James Kochan, chief fixed-income strategist from Wells Fargo Advantage Funds addressed local financial partners and community leaders on his insights about the current financial atmosphere on Tuesday.

Michael Penn / Juneau Empire
Michael Penn / Juneau Empire

Wells Fargo regional director Laurel Johnson said Kochan was invited to Juneau to share his expertise with CDs and money market accounts. Those accounts are delivering record low yield, she said, and so investors are looking for income.

Kochan said the biggest mistake investors are making in this market was "following the herd" in taking money out of the stock market and keeping too much in money in cash and short-term bonds.

"The herd is usually wrong," he said. "The biggest mistake is to be out of the stock market."

Kochan said he sees more value in longer term, diversified, actively managed bond funds instead of exchange-traded funds and the equity markets.

"As much as it pains me to say it, I see more value in equities," he said.

Kochan also said he does not believe the country is facing a double-dip recession. He does expect slow growth in the gross domestic product within the range of 2 percent a year, due to the overhang of unemployment and housing.

He said in an economic climate of slow GDP growth, a good investment manager can add value by finding the best opportunities in each part of the bond market. He gave an example of buying high-yield bonds in the BB credit area and avoiding low-grade investment debt in the CCC area. Kochan said he does not believe there is a bubble in bonds, but he would be selective in making bond investments instead of just creating a ladder of AAA-rated bonds.

Kochan said he favors corporate bonds over treasuries, which currently offer historically low yields. In the municipal bond market, he sees value in lower grade investments in the single A area which offer much higher yields than AAA bonds.

Bradley Fluetsch, managing director of Fluetsch Financial Services in Juneau, agreed interest rates are at an all-time low. He said two-year treasuries are yielding 0.5 percent interest and 10-year treasuries are yielding 2.5 percent.

Fluetsch's concern is the Federal Reserve's recent announcement on its pending decision to print more money.

"Right now, the most dangerous securities you can own now are U.S. treasuries and long-term bonds and non-protected bonds. With the Federal Reserve printing money, those bond prices are artificially high," he said.

Fluetsch said printing additional money is not the sign of a good economy and that it causes inflation.

However, he said it may bring a positive note for Alaska in that global commodities, such as gold and timber, will be devalued in dollar amounts, which increase prices of those local exports.

"The good thing is asset prices will go up, so owning stock like timber or gold or real estate will do really well from an investment perspective," he added.

Kochan also expects interest rates to remain low for an extended period and does not think the Federal Reserve will raise rates for the next 12 months.

"I think it is too early for bond investors to be overly conservative," he said.

He isn't worried about rising default rates in municipal bonds in spite of weak municipal economies, pointing out that there was not a substantial spike in municipal bond defaults even in the Great Depression.

He said a favorable thing about the stock market is that it's been historically cyclical in that, going back to 1835, decades which didn't have a positive return for the stock market are followed by above average returns for stocks and "we've just finished such a period."

Kochan does not recommend TIPS (treasury inflation protected securities) as he expects inflation to remain low in this slow growth economy.

Fluetsch said that many are recommending TIPS, but people can also buy other treasury-protected securities.

Housing was another factor Kochan emphasized, saying, "What's missing in the current economic recovery is housing. If housing were recovering as it has in past cycles we could see about 4 to 5 percent GDP growth rather than 2."

Fluetsch said his concern is that inflation can trigger mortgage rates from 3 to 4 percent to around 20 percent. He said this is similar to what happened during the Jimmy Carter administration.

"This is the kind of thing those in the home market are very concerned about what the Fed is doing," said Fluetsch.

He said for housing and investments, the next few months will be crucial.

Kochan is also an adjunct faculty member in the School of Business at the University of Wisconsin-Milwaukee. He has been quoted frequently in the financial press.

His visit was sponsored by Certified Investment Management Analyst and senior financial consultant Steven Brantner and financial consultant John Brantner of Wells Fargo Private Client Services.

• Contact reporter Jonathan Grass at 523-2276 or at jonathan.grass@juneauempire.com.



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