Advice from Spiderman

06/03/2005 12:00 am EST


Ned Riley

Founder and CEO, Riley Asset Management

"I am a contrarian by nature," says Ned Riley , who joked with the audience by reading the actual definition: "a headstrong self-determination and lack of susceptibility to either authority or reason!" Here’s his "reasonable" yet contrary outlook.

"Lately, I have seen a lot of people talk about the obstacles in the market. There are problems in the market. There are issues in the market. I do a show called Bulls and Bears, and for about seven weeks now there is another bear in front of me. The point is that there are a lot of people who are talking about the market peaking. They are talking about profits being in a down phase. They are talking about oil prices at high levels.

"There are so many people talking bearishly out there. Everyone is talking about the deficit problem. The fact is, we have a smaller deficit than most countries ever see relative to our GDP. This consensus index of traders is about 30% bullish. The American Association of Individual Investors is just 16% bullish. There is a record short position in the NYSE. Consumer confidence is down. And the Wall Street Journal just had an article saying that value managers have a hoard of cash because they can’t find any stocks out there. I love that kind of talk.

"I think what’s most important is that no one is saying that stocks are the investment of choice and should be the highest returning asset over the next five, ten, or 15 years. I heard that all the way through the 1990s all the way up. But nobody wants to forecast that now. So despite the definition, I am a contrarian. I think over the next five to ten years, stocks are going to be the best investment. I believe slow is beautiful in this economy. I believe slowing down to the current pace of growth is absolutely terrific. Growth of 3% is beautiful. It doesn’t create inflation pressures. It puts those pressures on commodities. And I think the price of crude is going down to the low $30s.

"Fed policy? I love it. It’s a conundrum wrapped in an enigma, frosted by traditional analysis in a non-traditional world. That’s the way I sum up Alan’s position. I think the Fed is overstaying its boundaries. I think the ten-year Treasurywhich is lower than it was two months ago and lower than February of last year is telling me the right story. That yield is telling me that we will see slower growth and low inflation and that it will be good for stocks. The bottom line is that I like the market.

"Yes, there are some great money managers. But over the last 50 years, only 5% of all mutual funds have beaten the market. And over 25 years just 10% have beaten the market. So for individuals, I particularly like exchange traded funds. You can call me a ‘spiderman’ as I own and recommend several SPDRs, known as spiders. I have 40% in S&P 500 SPDR (SPY ASE). In addition, I would put 20% in the NASDAQ 100 Trust (QQQQ ASE) and 20% in Technology SPDR (XLK ASE). These two are a little similar in nature, with both having an emphasis on tech. I like technology stocks because I think interest rates will be coming down in the next 12 months. And that’s going to be the first group that investors will go after. In addition, Wall Street really hates this group with a passion. Institutions and hedge funds under-own the tech group, which gives me a lot of encouragement. I’d put 20% in each one of those positions. In addition, I’d suggest a 10% position in Consumer Staples SPDR (XLP ASE), because I think the leadership is shifting from commodities and oil to staples, in line with my expectations for a slow growth economy. And finally, I’d suggest a 10% position in the Healthcare SPDR (XLV ASE). That’s what my portfolio looks like now. Period."

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