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Fresh money drives stocks


Dear Mr. Berko:

I have a $207,000 individual retirement account (IRA) with good utility, drug, consumer staple and food stocks, but it hasn’t done much as the market has gone higher. Please tell me why the market is doing so well in the face of all the negative economic news. It doesn’t make sense. At the same time, I’m tired of watching my supposedly good stocks stand still and would like you to recommend some aggressive issues that can add some excitement to my portfolio. It seems that I am among the few people who are not making money in the market.

W.R., Elkhart, Ind.

Dear W.R.:

You are among the many folks who are not making money in this market. Lots of folks are not making money in this market, but they are embarrassed to admit it, so they lie and tell you they’re making it big.

Two of the most powerful reasons that the stock market is doing well are (1) the Federal Reserve is printing money (close to $4 trillion by the end of 2010), flooding the market with liquidity. However, this liquidity is not inflationary (yet) because the banks are not lending. And because it doesn’t make sense to allow those trillions to collect “vault dust,” those trillions are used to buy securities.

Now, the value of the 3,066 issues on the New York Stock Exchange is $14 trillion. Because the $4 trillion sloshing in the economy represents 30 percent of that $14 trillion in stocks, it’s no wonder the market has made new highs.

The second reason the Dow is gamboling higher is low interest rates. The Fed keeps rates low by overwhelming the economy with new money. Because the economy is flooded with cash, and borrowing costs are near zero, investors are more willing to take extraordinary risks. So in the face of terribly high unemployment, crashing home values, a seriously sick mortgage market, nearly nonexistent bank loans, unparalleled real estate foreclosures, a record deficit and national debt, the collapse of municipal pension funds, a state debt crisis, a do-nothing Congress, a shaky European Union, oil exceeding $80 a barrel, a possible decline in our gross domestic product and corporate earnings for the coming quarter … what other reason could there be for higher stock prices?

If you want some action, I recommend that you use $30,000 (l5 percent of your $207,000 IRA) and invest $6,000 in each of the following. These issues offer good exposure to potentially high returns.

Vanguard Emerging Markets (VWO-$46.31) tracks the 748 common stocks in the MSCI Emerging Market Index. Barclays Capital High Yield Bond (JNK-$39.96) has a $5 billion portfolio of junk bonds and yields 10.16 percent. Neuberger Berman Real Estate (NREAX-$10.61) owns a variety of real estate investment trusts and property development firms. Gateway Fund (GTECX-$25.54) writes puts and calls against the Standard and Poor’s 500, as well as a basket of similar issues. Akre Focus Retail (AKREX-$11.58) is an aggressive small mid-cap fund. And Pimco EqS Pathfinder (PTHDX-$9.92) is run by two managers who are good at finding low-priced foreign stocks.

Unlike your utilities, drug and food stocks, these six issues participate in a wide spectrum of choices, giving you a little more zip for your doo-dah.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com

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