by Dr. Mark Skousen, Chairman, Investment U
Tuesday, October 24, 2006: Issue #597
We’ve seen a string of solid sessions on Wall Street lately. And the Dow’s reflecting the optimism as it settles in at new highs, above 12,000.
Along the way, we’ve covered a lot of ground here at Investment U, digesting the recent decline in commodities, looking at the sobering outlook for residential housing prices in the U.S., and uncovering several potential blue chip plays.
It’s time to test your investing knowledge
Take a crack at these five questions and check your results below. And remember, this is an “open book” quiz – the Investment U Archives are at your disposal. Good luck! And good investing
1. Which investment strategy typically beats the Dow on an annual basis?
A. Buying the “Dogs of the Dow”
B. Buying the stocks on Fortune’s “Most Admired Companies” list
C. Buying the “Flying Five” stocks of the Dow
D. All of the above
2. We’ve recently learned the real reason commodities have taken a breather of late: The Fed’s fight against inflation is working. And gold – the ultimate inflation hedge – has backed off its highs. Where’s the best place for your money right now?
A. High-Income Bonds
B. Dividend-Paying Stocks and Money Funds
C. Foreign Stocks
D. All of the above
3. Cap-weighted exchange-traded funds (ETFs) are a low-cost way to match the performance of the major indexes and various sectors. But an emerging class of ETFs is turning out to be more profitable because the stocks within the funds are measured not by how big the companies are (market capitalization), but by their:
A. Increases in volume, year-over-year
B. Management style
C. Fundamental value
D. Increasing institutional ownership
4. Which of the following real estate markets is still “hot,” and likely to grow at roughly 25% a year?
A. Mexico City, Mexico
B. Buenos Aires, Argentina
C. Minneapolis, MN
D. Orlando, FL
5. Homeowners carrying adjustable-rate mortgages could see their payments double over the next 18-24 months. And bankruptcies are already on the rise. What’s the best option for sellers right now?
A. Boost “perceived value” by increasing the asking price 1%-2%
B. Take the first reasonable offer
C. Add another full bathroom
D. Throw in the family car and $5,000 cash back
Investing Knowledge Answers:
1. D. With a few exceptions, the “Dogs of the Dow,” Fortune’s “Most Admired Companies” and the “Flying Five” stocks in the Dow all turn in better annual results than the broad market. Investment U #593 contains the 10 stocks on Fortune’s Most Admired Companies list. And Investment U #596 will show you the “Dogs of the Dow” and “five stocks on the fly.”
2. D. Under new chairman Ben Bernanke, the Fed has beat inflationary expectations in two ways: First, it created a negative yield curve by raising the Fed Funds Target Rate to 5.25%, substantially above the long-bond rate (currently 4.6%). Second, it slowed down the growth rate of the money supply. The broad-based money supply (M2) was growing at a 6%-7% clip a year ago. Now it’s down to 2%, and gold and oil stocks have collapsed. The bull market on Wall Street has returned. And high-income bonds, dividend paying stocks, foreign markets, and money funds earning 5% are four areas your money should be treated well. See Investment U #590, The “Fight” That Knocked Out Commodities.
3. C. Standard & Poor’s, Dow Jones, Russell and other indexers weight each stock in their index according to market capitalization. But research shows that funds weighted by fundamentals, such as book value, free cash flow, sales and dividends, get better returns overall, with less volatility.
4. B. Argentina is experiencing a steady recovery after its economic crisis in 2002. The economy is among the fastest growing in the world, expanding at a rate of 8.6% over the past 12 months. And its real estate market offers tremendous upside, especially in Buenos Aires. In some of the neighborhoods there, properties are appreciating anywhere from 10% to 25% a year. But buying property in Buenos Aires isn’t the only way to tap the country’s economic expansion.
5. B. Almost one out of every two potential homebuyers are backing out right now, according to homebuilder DR Horton. Mortgage payments are set to double. And sellers are in “denial.” By this time next year, home prices in places like Nevada, California, Florida and Arizona will not be down 5%, as the experts predict, but could fall two or three times that number.
What’s Your IU IQ?
5 – Dean of Finance
4 – Business Professor
3 – Investment U Graduate Student
2 – Investment U Undergraduate Student
0-1 -Try again in the spring
Today’s Investment U Cribsheet
- If you’re looking for specific growth stock recommendations, The Oxford Club’s trading portfolio is top-notch. The Hulbert Financial Digest recently confirmed the Club’s track record – 85% in the last five years, far outpacing the S&P 500. As of Friday’s close, 28 out of 29 positions were profitable. Here’s how to become a private member.
- Takeover Profits Shares of Connetics Corp. (Nasdaq: CNCT) surged more than 45% Monday on news that Stiefel Laboratories – a privately held dermatology drug maker – will purchase the company for $640 million. Stiefel said it will buy all outstanding shares in Connetics for $17.50 each.