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Confessions of a Money Manager With Nowhere to Go


David Pauly, Bloomberg News

Dear shareholders of the Sophocles Value Fund:

Sorry to tell you this, but I’m stumped.  There’s no place I can invest your money today without appearing reckless.

Stocks, measured by the Standard & Poor’s 500 Index, are down 13% so far this year.  “Super-safe” Treasury securities lost 2.1% in the second quarter, even counting interest payments, according to an index compiled by Merrill Lynch & Co.

Prudent investors are supposed to buy both equities and bonds because one market should go up when the other goes down.

So much for conventional wisdom.

Stocks are a minefield.  Banks and Wall Street firms with their ever-growing subprime mortgage losses are only the beginning.  Profits generally are slumping.  The U.S. is either in a recession or will be after Americans spend their tax rebates.

On top of that, we have a rising inflation rate.  In the last 12 months, the Consumer Price Index has climbed 4.2%.  It’s not just oil and gasoline.

The price of steel sheet, the kind used in cars and appliances, hit a record $1,052 a ton in June, up 3.1% from the previous high in May, according to Purchasing magazine.

U.S. steel producers are passing on their rising raw-material costs, and the weak dollar limits import competition.

Worsening inflation is a killer for bonds. The Federal Reserve has made it clear that it soon will start raising interest rates to combat higher prices. Treasuries and all other bonds will drop commensurately.

Best Bet
At the start of the year, we figured oil stocks would be a no-brainer.  Somebody had to benefit from the record price of crude oil.  We couldn’t have been more wrong.  Our shares in Exxon Mobil Corp. have fallen 5.9%.

It seems oil-rich countries such as Venezuela and Russia are taking a greater share of the production pie from companies like Exxon Mobil, Royal Dutch Shell Plc and BP Plc.  And profit margins for refining oil are narrowing.

Out of desperation, we almost gave up our principles and bought tobacco stocks.  Ernie Nicker, our chief trader, pointed out that addicts remain addicted in bad times as well as good.  It was fortunate that we resisted the temptation.  Cigarette sales in one big market, the U.K., have dropped 6% since England banned smoking in public places a year ago, according to market research firm Nielsen Co. Imperial Tobacco Group Plc shares have declined 22% this year.I thought I had discovered a reasonable risk in General Motors Corp. bonds due in 2033 and paying 8.375% interest.

Risky Bet
When I looked, the bonds were trading at 59 cents on the dollar, yielding more than 14%.  You get your money back in a hurry.  Then Ernie reminded me that securities yield junk rates for a reason.

More recently, we considered going into commodities futures, along with the rest of the world.  Too late.  That opportunity seems to have passed.  Experts now fret that the parade in grains, metals, and even oil may be ending.  Yesterday, corn futures fell by the daily limit in Chicago.  Wheat prices dropped 5.8% the same day.  Farmers had planted more of both crops than expected, no surprise since prices have been so high.

The safest place for your money may be cash.  That’s not satisfactory either.  While it seems to maintain capital, the yield of 1.6% doesn’t come close to keeping up with inflation.  Warren Buffett can get away with holding oodles of cash but you wouldn’t be happy if a mere mortal did it with your money.

Nothing seems to work.  Looking over my shoulder just now, Ernie said, “How about dandelion futures?”  Ernie is a great kidder.

Imus Keepup
Fund manager




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