Category: Small caps

Russell Investments will reconstitute the stocks in the Russell Indexes after the closing bell today, Friday June 25. For many funds that track Russell's indexes this means there will be frantic buying and selling over the coming days.

Given the turmoil in the market over the past 12 months, analysts are looking for many familiar stocks to be jettisoned while previously unknown stocks are cast in the limelight.

What are the ramifications of "debt explosion" in the Western world today?  That's the question that Niall Ferguson, Harvard Professor of History and Business Administration sought to answer recently.

His conclusion?

The United States is actually worse off than the PIGS (Portugal, Italy, Greece, and Spain)

As stocks traded mostly sideways today, Federal Reserve Chairman Ben Bernanke paid a visit to Congress to address the House Budget Committee. In a surprising turn from what's been the hallmark of his reign as the head of the Fed, Bernanke seemed legitimately concerned about sovereign debt issues here in the United States.

He said, "To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges."

Strong words for a Fed Chief who has been responsible for the largest money supply increase in the history of the U.S. 

If you want to get rich from gold, the physical bars and coins won’t ever do that for you. Physical gold is great as a store of value. That’s all. The best we can realistically hope for is that it will stay one step ahead of inflation, and protect our principle. Physical gold has never, ever paid a dividend. There’s no compound interest. No cash-flow.

If you want to get rich, you have to stick your neck out a little and buy stock in small gold companies. It’s said that only one gold venture in a thousand will ever get any gold out of the ground – so it’s vitally important to buy the best of breed. A junior gold company that can actually mine gold and bring it to market can multiply gold’s gains many times over.

Unfortunately, most junior gold companies go belly up. And even worse: most of the geologists and marketers in the junior gold business are glorified con-artists. They might not have any gold at all, but they hope they can bump up the share price and sell their shares for a huge payday. Or they’ll hope to cherry pick some drilling results and sell their stake to a bigger mining outfit before anyone’s the wiser. Mark Twain famously said, “A gold mine is a hole in the ground with a liar standing next to it.”

What a great Super Bowl game! I have to admit, I was pulling for the Saints, but mainly because of what the Saints mean for that city. I'm sure we all remember the horrible aftermath of hurricane Katrina. The very existence of New Orleans was in question. The Saints considered moving, and I recall suggestions that only the French Quarter be saved and made into a corporate convention amusement park.

Of course, that would have been an absurd commercialization of a proud and rich heritage. That New Orleans has come back to resemble the city it was before Katrina is nothing short of miraculous, and now the people of New Orleans have a Super Bowl trophy to crown their achievement. Congratulations, New Orleans and the Saints.

It's tempting to extend the metaphor of New Orleans to the United States as we rebuild after the financial crisis. Of course, I have no doubt that we will recover. But there will likely be no single event that crowns the recovery like the Lombardi Trophy does for New Orleans.

And besides, we're investors. It is our desire to be properly positioned for a growth in stock valuations, all the while avoiding the pitfalls of overvalued stocks and worsening economic conditions.

Clearly, investors have been pondering the potential of weaker economy as some stimulus policies end, Europe faces debt problems and China moves to slow its economy. Bloomberg reports that investors pulled $9 billion out of global equity funds during the last week of January. And investors have bet heavily on an extended sell-off as evidenced by huge volumes of put option activity.

At the same time, 73% of S&P 500 companies have beaten 4th quarter earnings expectations. That's the best performance since 1993. Strong earnings, coupled with the recent 7.3% decline, have left the P/E for the S&P 500 at 18, down from 24. The forward P/E, based on future earnings expectations, is below 13.