WELCOME TO FABULOUS LAS VEGAS—um, no, make that fabulous Wall Street! (Got our signs mixed up there.)
Apple (NASDAQ:AAPL) crashed 4% Monday, for no particular reason besides rumor — apparently unfounded — that AT&T (NYSE:T) and other wireless carriers might trim the subsidies they pay for the iPhone. But the slot machines were ringing again yesterday.
Apple soared by even more than it fell Monday, and the Dow came along for the ride, up 194 points at the close.
If the market’s day-to-day movements lately are making less sense to you than usual, don’t feel bad. This casino-type atmosphere is exactly what Ben Bernanke and his fellow impresarios at the Federal Reserve have been trying, oh-so-hard, to create.
They want you to forget about risk. Roll them bones, and no more questions, please! Steve Wynn, Shelly Adelson and the other moguls along the Strip must be eating their hearts out.
With all the bells clanging and lights flashing on the casino floor, it’s easy to miss the obvious. The stock market advance that began with the climactic turnaround last October 4 is winding down.
We’ve had two warning shots so far: first, a 246-point drop in the Dow from February 29 to March 6, and then, a 548-point slide between April 2 and April 10. Typically, when Mr. Market is getting ready to land a sucker punch (a “correction” of 10% or more on the headline indexes), he softens up his victims with a series of increasingly nasty blows.
That’s what’s happening now, and it’s happening right on schedule, as we approach the market’s traditional wobbly season (“sell in May and go away”).
If you’re over committed to stocks, versus our recommended 51% weighting, watch for a rebound in the S&P 500 index to 1400 or higher during the next few days as a signal to rake some chips off the table. It doesn’t matter so much whether you sell winners or losers. The key is to have some spare cash on hand to buy the bargains I see coming over the summer months.
On the buy side, I’m particularly eager to build up our bond position right now, because yields are likely to drop again (yes, drop—contrary to the jabber you’re hearing) as the stock market backs away from its springtime highs.
It’s hard to get excited about U.S. Treasuries at these levels. However, certain foreign bonds continue to offer solid value, notably in Australia and, more broadly, in most of the Asia-Pacific region.
My favorite vehicle is a closed-end fund, Aberdeen Asia-Pacific Income Fund (NYSE: FAX).
For now, though, let me just point out that FAX yields a generous 5.7%, almost triple a 10-year T-note. What’s more, the average maturity of the fund’s holdings is only about seven years, so the interest-rate sensitivity of the portfolio is less than that of a 10-year Treasury.
Credit quality is good, too, at an average rating of single-A. Thus, your main risk, in my judgment, has to do with currency fluctuations. About 65% of the fund’s portfolio is denominated in currencies other than the U.S. dollar, mainly the Australian dollar but also a palette of Asian currencies from the Chinese yuan to the Thai baht.
Frankly, I think most of those currencies are likely to retain their purchasing power better than the greenback over the long haul. Indeed, that’s a good part of the reason why I want to own the Aberdeen fund now. If anything, FAX’s policy of borrowing moderately to increase the size of its portfolio should magnify the benefit of these strong currencies in the months and quarters ahead.
