Where to put your money now
Even some great investing minds are confused. But don't run scared. We found a few intriguing opportunities including steel, Microsoft - and cattle futures.
(Fortune Magazine) -- How treacherous are the financial markets these days? So treacherous that you can get blind-sided even if you're one the world's great investors, even if years ago you anticipated the credit crisis now roiling Wall Street - even if you're George Soros.
After posting big gains in 2007, Soros's $17 billion Quantum Endowment hedge fund has been flat in 2008. The profits Soros earned shorting the dollar have been wiped out by big positions in free-falling Chinese and Indian stocks. Yet Soros seems unperturbed. "We are in a period of acute financial wealth destruction," the 77-year-old superstar speculator tells Fortune. "If you can preserve your capital in a period of wealth destruction, you're doing pretty well."
Soros isn't the only investor struggling for answers. Fortune interviewed a dozen or so leading money managers and market gurus about where to invest now, and the only thing they agreed on is how unpredictable the financial markets have become. "The avoidance of risk and the search for safety is more intense now than I've ever seen in my career," says Bob Doll, chief investment officer for equities at Wall Street money manager BlackRock (BLK, Fortune 500).
Everyone has his own take on what's safe and what's risky, of course. Soros thinks U.S. stocks and bonds are risky. In his view, the United States is either near or in a recession, unemployment (now 5%) will continue to rise, and the housing crisis will only deepen as more homeowners get slammed with rate resets on their interest-only mortgages.
He's also worried that the Federal Reserve's aggressive rate cutting has laid the groundwork for an inflation spike. Soros summarizes his investment strategy for 2008 this way in his new book, The New Paradigm for Financial Markets (available in e-book form at georgesoros.com now, in print in May): "Short U.S. and European stocks, U.S. ten-year government bonds, and the U.S. dollar; go long Chinese, Indian, and Gulf-state stocks and non-U.S. currencies." He likes the short-term outlook for oil and commodities too.
Soros began sounding the alarm about a credit bubble years ago, and what's interesting about his macro view - and what's telling about the challenge of investing successfully these days - is that a slightly different interpretation of the credit bubble's impact could be used to construct a radically different investment strategy.
After all, the same easy credit that fueled the U.S. real estate boom helped energize the rally in commodities and emerging markets. As the financial markets de-lever - in other words, as banks trim exposure to exotic investments and cut lending to consumers, hedge funds, and corporations - the risk of a commodities or emerging markets collapse intensifies.
"Name any growth story from the last five to seven years, anywhere around the world, and I will tell you it's directly or indirectly tied to the credit bubble," says Merrill Lynch (MER, Fortune 500) chief investment strategist Richard Bernstein, who thinks U.S. stocks are now a better value than those of developing nations.
Another wildcard is the cost of crude. Bears think the bursting of the credit bubble will starve speculators of leverage they've used to help bid up oil prices. Also, a recession in the U.S. will further dampen fuel demand. According to MasterCard SpendingPulse, drivers bought 7% less gasoline during the week ending April 4 than during the same period last year. If that trend continues, a return to $65 a barrel (the price a year ago) seems possible.
Or oil could reverse course and shoot up to $165, which seems no more or less likely. To some extent, basic market mechanics have broken down. Typically, high prices in the futures market serve to stimulate new production. Over time, that brings down prices. But according to James Burkhard, director of oil market analysis at Cambridge Energy Research Associates, a shortage in oilfield personnel coupled with the rising cost of rigs and other equipment has reduced oil companies' willingness to invest in expanding production or developing new fields.
On top of that, there's little incentive for state-owned oil companies to boost output. "If Saudi Arabia pumps more oil, it tends to depress prices, and it generates a bunch of cash that they need to invest," says John Brynjolfsson, a commodities fund manager at Pimco. The Saudis might accept lower prices if they could get good returns on their investments, he adds, but in today's low-rate environment, that's tough. In other words, they can get a better return leaving the oil in the ground.