Making Sense of the Weak Dollar


The greatest risk for investors over the next 10 years is not being invested in the U.S. markets. That's the opinion of Michael K. Farr, president of investment firm Farr, Miller & Washington, who recommends looking to the long term with diversified investments. However, Farr says in the near term it is normal for the markets to "pause to collect themselves," given that the S&P 500 index, for one, is up 18% so far this year.

These were a few of the points Farr made in an investing chat presented Nov. 20 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts follow, and a full transcript is available on AOL at keyword: BW Talk.

Q: Michael, the market hasn't seemed able to get itself going the last few days. Is terrorism the explanation?

A: The markets have seen very positive returns so far this year. The S&P has seen an 18% increase year-to-date. While terrorism certainly had an effect on markets today, it seems fairly normal that we would have some pullback after such an increase. We are in this no-man's land of the quarterly cycle. The majority of S&P 500 companies have reported, economic data are scarce, and investors seem starved for actionable news. As we digest earnings and anticipate the end of the year, it seems normal to us that the markets would pause to collect themselves.

Q: Do you think the U.S. dollar will stay weak? Are you making any investments based on a falling dollar?

A: I think that the decline in the dollar has more room. In spite of a strong-dollar policy, the Administration has a concurrent policy against currency intervention. This is a complicated way of saying we'd like it to be strong, but there is not a lot we are going to do about it. I continue to think that the rebound in the Asian economy, Japan in particular, is for real, and that we can look for continued strength in that economic region. We own shares of the Scudder New Asia Fund (SAF), which we believe will benefit from those improvements.

Q: What do you think of Johnson & Johnson (JNJ), General Electric (GE), and Bank of America (BAC)?

A: Those are three of my favorites. I think that JNJ as a health-care and pharmaceutical company is well-managed and well-diversified and represents good value at these levels. The health-care group and pharma group in particular have underperformed over the past 12 months. The contrarian in me always likes to put money into those companies and areas that have not been performing particularly well.

I like GE for many of the same reasons. They have not performed particularly well over the past year. We have seen an increase in the price of GE shares from the low 20s to the current $29-range. At 16 times the '04 estimates, with a long-term earnings-growth rate of 12%, we think that the economic slowdown presents investors with a rare opportunity to buy GE shares at a discount to the S&P 500 average.

BAC is still relatively inexpensive on a historical measure. BAC is going to see its growth slowed somewhat by the acquisition of FleetBoston Financial (FBF). It is a diversified financial-services company -- 11 times earnings. Growing their investment-banking share, they will benefit from a demand in corporate loans. I think they will profit on their time deposits in a rising rate environment. They have a great market footprint across the country and should provide steady growth to most portfolios. It is not an aggressive name. It, in many ways, is something of a value stock -- more steady than exciting.

Q: Do you think the reforms proposed will undo the wrongs in the mutual-fund trading scandal?

A: I don't think you can undo the wrongs. At best, you create an environment that will help prevent them in the future. In my over 15 years in this business, I was always taught that there is nothing more sacred than the trust made by the individual investor.

I encourage all investors to check the legal and ethical history of any firm or broker with which they consider doing business. Nothing speaks more loudly than money on Wall Street. Use your money to speak up for those who have been honest and ethical -- good stewards of the public trust.

Q: What about Microsoft (MSFT)? With $50 billion sitting in the bank, you have to like that company.

A: I like Microsoft, not necessarily because of its cash position. I like it because of its market share, its management, its cash flow. It is the highest-quality software developer/manufacturer in the world. At 22 times earnings and 12% growth, I think it's a core part of any growth portfolio and certainly the technology piece of any portfolio.

Q: You said you liked the Scudder New Asia Fund (SAF). Do you see a mutual fund as the best way to play Asia?

A: Yes. A diversified approach is necessary because it is very difficult for most investors to do intense research on several companies in different markets, with different reporting standards, so a fund makes sense. This is a closed-end fund that trades its shares on the New York Stock Exchange. It is a good performer and a cost-effective way to diversify into Asian markets.

Q: How have the portfolios you manage been doing compared to the indexes?

A: Our performance, complete with disclosures, is available on our Web site. Here's my disclaimer: Our portfolios have been doing well. Please check the disclosure, but we are well ahead of the S&P 500 year to date and in each of the last five years. You can also find a copy of our quarterly newsletter on our site.

Q: Are bonds a good idea at this time?

A: No. Interest rates are still near their 50-year lows. On Wall Street, we know that the pendulum always swings too far. The swing toward higher rates has barely begun. This can be a process that takes years. Any bond investments that we would make would be of very short maturities.

Q: So what investing strategy would you suggest for us in this market, Michael?

A: I'm very interested that only one of our questions this evening has been on a tech stock. I think that that is the first time in over a dozen of these chats that I've done where that has happened. Maybe it indicates that we're growing wary of those that have appreciated so much. That would strike me as a very good sign.

Be cautious. Be careful. Do your homework. Have a discipline. Have a long-term outlook. Be diversified, but be invested for the long term. Remain invested in this market. The greatest risk, in my opinion over the next 10 years is not being invested in U.S. markets.


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