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Dear Mr. Berko:

Dear S.M.:

I have a simple philosophy about investing. No matter how attractive a prospective investment appears to be, no matter how good the rate or strong the guarantee, if I don’t understand how it works or if its moving parts are difficult to explain, I kick it in the shins (or some other body part) and scoot away. I’ve heard of a Stepford wife but not a Steepener CD. So I called my favorite source of esoterica, Guru Bob, who runs a multibillion-dollar hedge fund from his Boston office tower, and in one word he said: “Forgetaboutit!”

“In order to understand this thing,” he told me, “you need an engineering degree from Georgia Tech, a law degree from Harvard, a Ph.D. in theology from Yale Divinity School and a master’s in statistical analysis from MIT.” Holy Moses, Mary and Moe, I’ve got a fever already.

Anyhow, Guru Bob said Steepener CDs are like Rube Goldberg contraptions with more moving parts than a Rubik’s Cube. For instance, the CD about which you asked has a one-year 10.5 percent guaranteed interest rate. After the first year, the interest rate is based on 10 times the difference between the 10-year CMS, or constant maturity swap, rate, and the two-year CMS rate, or positive yield curve, as observed two business days before the start of the quarter. But, if the two-year CMS rate on the observation date is greater than the 30-year CMS rate, or negative yield curve, no interest is paid for the entire quarter.

And though this thing is FDIC insured, there are some complicated risks including, but not limited to: loss of interest for a significant period of time, credit risks and market risks, because if you need to sell this contraption before maturity, you’re going to have a hard time locating another sucker. Frankly you’ll need a superpowered Cray computer to figure out what this abomination is really worth.

And, by the way, that FDIC guarantee is only valid if you hold this quirky CD to maturity. The usual commission cost for a $25,000 Steepener CD ranges between 2 percent and 4 percent. So if I were you, I’d tell your broker, “Stuff it.”

But I do like his Ralcorp Holdings Inc.(RAH-$68.85) recommendation. RAH, which just bought Kraft Foods Inc.’s Post cereals division, produces Nutcracker, RyKrisp, Bremner, Carriage House, Medallion, Ralston, Post and other brands whose revenues have grown from $580 million in 1998 to $2.6 billion this year. Proof of this good pudding is the stock price, which was $18 in 1998 and $68 today.

RAH is a magnificently managed company with only 26 million shares out and good prospects for the future. The trailing 12 months per share earnings are $5.30, so it trades at a very reasonable price-to-earnings ratio of 12.9. Value Line believes the shares could trade in the mid-$90s in the coming few years.

I like this $2 billion market cap company. It has held up well in this stinky market, and I suspect it will respond rather nicely when the Dow recovers. Even though it doesn’t pay a dividend, I’d buy 400 shares in a Michigan minute.

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