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Bulls, bears debate value of gold investing

Financial guru Louis Navellier proffers assessment of market, jobs, inflation

Special to the Palm Beach Daily News

Saturday, February 6, 2010

Sometimes college pays off. Really pays off.

Take Louis Navellier's college experience. While at Cal State in the 1970s, one of his graduate class projects sought to find a way to duplicate the performance of the S&P 500. Being the research and numbers guy he admits to being, Navellier got into the project big time and created a model that didn't simply duplicate that index but actually outperformed it. Consistently.

It was from that experience that his first investment newsletter was spawned in 1980, based upon his quantitative analysis of growth stocks. Seven years later, he began managing private accounts for high-net-worth individuals. Then came mutual funds. The first: his Blue Chip Growth Fund.

Today the Manalapan resident manages billions in private and public monies and four mutual funds, and publishes four newsletters. He is founder of Navellier & Associates, based in Reno, Nev.

I caught up with Navellier last month at the Naples Grand Beach Resort prior to one of his investment seminar presentations and before the fourth quarter 2009 GDP numbers came out. He expected the GDP number to be strong, which it was. Since then, the market has flirted with a close under 10,000 and left investors wondering whether the bull market that began in 2009 is over, and how world-wide sovereign debt concerns will affect their equity investments. Navellier, however, is quick to remind us that the stock market is more than a market, and how merely watching the performance of various indices can be misleading.

"The bare indexes can mask a major turning point in the rotation from junk stock into higher-quality stocks," he wrote in his Feb. 4 Navellier Marketmail: Special Edition. "Most top-quality stocks have languished.... But all the recent bad news is distracting attention from the fundamental story regarding earnings growth for most top-quality stocks...."

Navellier is an affable guy with decades of investment arena experience. He is a growth investor, basically optimistic about this year's stock market, and understands the markets as well as how individual investors think with respect to market volatility: "A lot of people like up-volatility but they don't like down-volatility," he told the audience in Naples.

He got that right, too.

Here's more from the interview:

Q: Before we talk about the market, what do you think are some of the political problems facing us now?

A: The problem with the country is actuarial. There are fewer people paying into the system Social Security and Medicare.

So whomever we elect might have to tell people that Medicare and Social Security are kind of a pyramid scheme and either we get more people to pay in or we'll have to cut your benefits which of course would be political suicide.

I think the next big test will be the 2011 tax increases to see what comes through with regard to any changes there.

But it really doesn't matter who we elect. I think Wall Street just likes and wants constant gridlock.

Q: How about the business climate around the country?

A: I think what makes the country great is of out 50 states, 30 want some business. So the people in New York come down here and they get depressed and the same for those in California. But I say, well, have you been to Texas or Alabama or Mississippi lately? It's a lot better there as these states just are more pro-business states.

We did a seminar in Fargo, N.D., recently. It's like the only place creating jobs in the whole U.S.

Q: And your outlook for the stock market this year?

A: We are very positive.

In our program, we have a picture of Buzz Lightyear and say that earnings are going to infinity and beyond. Let me explain that: A year ago [earnings] were negative. Now they are going to be positive. So they are going up an infinite amount. And then will start to decelerate.

After the first quarter [2010] earnings come out in April and May, we'll see the growth rate back off and decelerate. Later this year, they will decelerate too. But when you add it all up, they will probably be the best earnings in my lifetime.

Now, [earnings] are exaggerated by ridiculous, year-over-year comparisons because things were so bad the year before. But the reason that earnings are better is because there is a global recovery that China started, then [it] spread to Australia and Brazil. And it's been a V-shaped recovery that is finally rubbing off on us.

But the big news of the market will be on Jan. 29 when the GDP numbers are released. GDP is supposed to be up 4.3, according to one survey. But my favorite guy, Edward Yardeni, says they are going to be up 6.5 percent.

Q: And if they're not?

A: Well, they are going to be up at least 4.3 percent, because there was a lot of inventory rebuilding. Inventory rebuilding is going to keep the economy going through all of this year. [On Jan. 29, the GDP was reported as up 5.7 percent.]

Q: But who is buying?

A: Well it's mostly businesses rebuilding inventories.

Q: How about investments?

A: Basically, Wall Street likes to rotate from thing to thing.

In 2008, the best investments were Treasury securities because everybody was freaked out, so Treasury bonds rallied. In 2009, the worst investments were Treasury securities and the U.S. had the worst performance on sovereign debt ever.

But the high-yield corporate bond market was incredible last year with some investors getting an annual return upwards of 40 percent.

However, we're probably in the ninth inning of that rally that's going 11 or 12 innings. And we do think that people will get more and more comfortable with stocks as they see good earnings reports coming out.

We're also bullish because we have a lot of cash on the sidelines.

The Catch 22 now is that not a lot of money is going into stocks. There is tons of money on the sidelines more than in March of 2003 or in 1990 or 1982.

Q: How about gold?

A: I'm pretty positive about gold because there is a physical shortage. There is gold in the airbags in your car, you pull back the cockpit on an airplane and everything is coated with gold they don't want things to corrode. So gold tends to go up as electronic uses go up. Plus, you have all the sovereign debt concerns. We don't expect it to fall below $900.

Q: Inflation?

A: We had wholesale inflation come out and it wasn't bad in December, but in November it was up 1.8 [percent]. All of that is tied to the dollar.

The dollar has been weak because of our deficit. And the dollar has lost half of its value against the euro in the past decade, which I guess is better than Venezuela losing half of its value in one weekend. Which is what happened to them.

But when the dollar is weak for a long period of time, eventually we get a lot of foreign companies moving here because we have better transportation, better electricity and excess labor. Volkswagen is in Chattanooga, Tenn., and Mercedes is going to be building cars in Alabama.

Q: What about jobs?

A: The bottom line on jobs is that all of the private-sector jobs created since '99 have been eliminated.

That wasn't all Obama's fault, but when the economy recovers it tends to begin with contract jobs and temp jobs.

Everybody expects jobs to get better. A survey by economists expects 1.4 million payroll jobs will be created, and I think that will happen. But if you create 1.2 million jobs, unemployment stays at 10 percent. You have to create 100,000 jobs a month to keep unemployment at 10 percent.

The jobs we need to create are payroll jobs that will add money to Social Security and Medicare.

Q: Your overall market outlook?

A: It's been a quality market since September. But things are going to decelerate after May, so [the market] is going to get bumpy. Then we'll have the summer shenanigans to deal with, so we're painting the picture of a narrow market environment this year.

And I think we have to restore confidence. It needs to go up and I think it will. A lot of people will remember that Bill Clinton was a very good president in his third and fourth year.

Q: The most important take-aways?

A: Well, I think earnings are going to be the best earnings in my lifetime. I think that we are in a legitimate business recovery, but we do need consumers to continue to cheer up. Consumers did a very good job of that in the fourth quarter.

I know they are still mad, politically, but I think they are very hopeful. And because bonds' yields can't fall much more, I think people will return to stocks.

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