Contrary Plays for True Wealth

06/18/2004 12:00 am EST


Steve Sjuggerud

Founding Editor, DailyWealth

For investors willing to go against the grain of Wall Street, Steve Sjuggerud’s True Wealth is a "contrarian’s delight." In almost direct opposition to the general consensus, he is a bull on corporate bonds and a bear on Japan. Here's his review.

"Corporate bonds are the ultimate contrarian investment right now. Everyone, it seems, hates US bonds. It's not really possible to get any more negative about the prospects for an investment, which usually means it's the optimal time to buy that investment. The wide spread in the yields of corporate bonds over Treasury bonds tells that story. With virtually none of the ‘Big Money’ bullish about corporate bonds, we have an extraordinary opportunity to get in now, very cheaply. The very best way is through the Corporate Bond iShares (LQD ASE). This exchange traded fund pays about a 5% annualized dividend, and dividend payments are monthly. The pros currently have 75% in stocks and only 14% in bonds (most of which is probably in government bonds). Looking forward, chances are the pros won't increase their stake in stocks much more. And they won't decrease their holdings much in bonds. Based on that, in the next few years, the big money may end up selling stocks and buying bonds, simply to bring their allocation back to a more normal level. We'll simply buy bonds now, at the historically wide spread. It's that simple. Buy LQD, and collect 5% a year in interest, with the potential for large capital gains."

"For the same reasons we're buying corporate bonds, we're selling Japan. If you own any stocks in Japan, I recommend selling them. And I even recommend taking it one step further: it is time to sell short in Japan. I have never seen such optimism over an investment market like we're seeing in Japan right now. An international brokerage firm reported the results of a poll of Japanese fund managers last week. I was astounded to find that zero percent fund managers believe Japanese equities are overvalued. This is optimism at an extreme. I look for three things when I look to invest in anything: extraordinary value, investor apathy, and the beginning of an uptrend. Japanese stocks, as measured by the Nikkei 225 Index, are selling at a p/e of 62. Japan offers exactly the opposite of what I look for in an investment. You've got expensive stocks, an extreme in optimism, and the beginning of a downtrend. It is the perfect recipe to go short, and profit from the fall. Fortunately, there is an excellent way to do this. It is by selling short Japan iShares (EWJ ASE), which is basically an index fund of Japanese stocks. iShares trade in the US just like a stock, and are easy to buy and sell. The Japan iShares, making the iShares a really the perfect way for US investors to profit from a fall in Japanese shares."

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