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Stock Market Predictions for 2004-2005: An Interview with Dan Denning of Strategic Investment

 

Stock Market Predictions for 2004-2005: An Interview with Dan Denning of Strategic Investment

By Dr. Steve Sjuggerud, President, Investment U
Tuesday, February 24, 2004: Issue #314

Dan Denning is one of the smartest guys I know, which is why I tapped his brain for his 2004-2005 stock market predictions…

(Side note: I once asked him to give me a list of the five books that influenced him the most. But not one of them was “how to be a great investor.” In fact, all of them were too much for me (stuff you can’t even spell, like Thucydides). And I’ve got a PhD! It’s not often that I’m intimidated by the sheer amount of reading and thinking someone has done. But it is the case with Dan Denning.)

I like to spend time with him, pondering the world. This morning, with my # 2 in charge at Investment U, Brian Hunt, we interviewed Dan to see what’s kicking around in his head right now. During the course of the interview, he shared with us his stock market predictions for 2004-2005…and what he believes is the best stock for the next 10 years… So let’s get started:

Steve Sjuggerud: Dan, what would you tell someone just getting into investing right now?

Daniel Denning: The first thing they’d have to realize is that there’s very little value to be found out there now. They’re not going to like that answer if they’re expecting stock market predictions for 2004-2005. But people still have to do something with their money. So what I’ve been doing for the last year is making different market calls…

If there’s a lot of money sloshing around in the market, which there is right now, instead of finding the value, you have to find where the money is going.

For example, on the income side, money has been flowing into Australia, where short-term interest rates are in excess of 5%. Another place is raw materials, and I like those. In terms of regions, I like the Far East, in particular Australia, because of the long-term dynamics in the China story and the growth of Asia.

My approach starts with “where are the values now?” at the macro level… “Are we in a bull market or a bear market?” And then my investment selection is dictated by that call. So then I figure out what asset to be in, what region to be in, etc.

Brian Hunt: So, specifically, how is this playing into your 2004-2005 stock market predictions, and how are you playing the Australia and raw materials ideas?

DD: Normally I like to buy exchange-traded funds, but there wasn’t a good way to buy raw materials through an ETF. I am going long the Australian stock market ETF (symbol: EWA), because Australia is a commodity-producing country.

BHP Billiton (symbol: BHP) has been on a tear recently in the stock market because Australia has been exporting a tremendous amount of raw materials to China.

Australia is a great story, as a commodity-producing country with attractive interest rates, so it’s attracting foreign capital. And it’s sort of a peripheral China play. For example,

SS: You know, that’s my latest recommendation… By the way, Dan, do you own it?

DD: I got gun-shy, because the stock trades at a P/E of like 60 right now.

SS: Yes, but the forward P/E is more like 16.

DD: Is it really? See Steve, you’re always one step ahead of me. At least I’m catching up a bit

SS: Dan, shifting gears, what’s your answer when you get asked about the “traditional” investment advice of having 70% in stocks and 30% in bonds?

DD: I generally don’t talk about allocations in the conventional sense. Given that I think we’re in a serious bear market where stocks could fall dramatically, I don’t recommend owning a lot of stocks. If you pressed me, I’d recommend 25% in gold stocks. I’d recommend 15% in bonds, through exchange-traded funds. They’re a great way to get invested in fixed income without having to buy bonds themselves, and they’re easy for individual investors to understand and buy.

We recommend a handful of exchange-traded funds, which are Asian country funds. Japan, Taiwan, Singapore, and then the emerging markets fund (symbol: EEM), which I think you own as well, Steve. [Editor’s note: Dan’s right.] It’d be 25% in stock-like investments. That’s about as much as I feel comfortable with in stocks. I also recommend a good-sized position in stock market puts [a kind of option], expecting a fall in stock prices.

SS: How do you get out of a position?

DD: I do use trailing stops to get out of a position, but not all the time. I actually don’t recommend them with the gold stocks. Even in a bad bear market for the general market, the commodity stocks will weather the storm better and still be worth owning at the end of the day. That’s my thinking now, at least.

The thing is I don’t follow gold necessarily as a commodity; I follow it as money… as the anti-dollar. So that’s the basis of our gold stocks. The capital investment in the gold industry is at 20-year lows. I think commodities are in a secular bull market, but our reason for owning gold is because of the dollar.

SS: Concering your stock market predictions for 2004-2005: If you could buy only one investment now, what would it be?

DD: I don’t like making predictions, but I would buy Newmont Mining (symbol: NEM) right now. It’s the easiest way to buy gold. It’s unhedged, it’s liquid, and it’s a good proxy for all the big ideas I’ve been talking about… the bull market in commodities, the anti-dollar, etc.

If there were only one decision you were going to make in the stock market, I’d buy Newmont Mining and forget about it for 10 years.

SS: Thanks, Dan.

Good investing,

Steve


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