Keep Going Sideways

David
Rosenberg, ex-Chief Economist with Merrill Lynch, now with Gluskin Sheff,
kindly mentioned my book in his research on
Monday. 

 Vitaliy
Katsenelson, a Denver-based money manager who recently wrote a bible of a book
on investing (we had the honor of reading the manuscript) is featured on page
14 of Barron’s. He stated that he is looking for a “sideways” market and
screening for “companies that have a lot of cash.” He himself has a ton of cash
too — a 35% cash position and lays out the reason very clearly — nobody “can win buying an overvalued asset and
hoping it will appreciate.” Well, at least there are a couple of seasoned
professional investors out there who understand what the risks are.

 Here
is the Barron’s article
he was referring to:

 VITALIY
KATSENELSON, a Denver money manager who is considered one of the bright young
minds in the investment world, is neither a bull nor a bear. He is a
"sideways" investor, convinced that the stock market is stuck in the
midst of a secular trading range that's going to persist for many years. Hence,
the title of his most recent book, "The Little Book of Sideways
Markets." ?In his tome, Katsenelson sums up his investing philosophy this
way: "Being a contrarian thinker or an independent thinker is vital for
success in sideways markets." ??

Katsenelson, who grew up in the Russian
navy town of Murmansk before emigrating to the U.S. in the early 1990s,
observes that a similar range-bound market occurred from 1966 to 1982. The
problem with such markets, he says, is that while corporate earnings can grow
at a decent clip, price-earnings ratios compress, squeezing equity prices,
often for decades. ??He also is the chief investment officer of Investment
Management Associates, which has about $60 million under management. From Dec.
31 of 2005 through the end of this year's third quarter, the average annualized
performance of the active value accounts was 4.1%, net of fees, versus 0.2% for
the S&P 500. ??Barron's caught up with him this week during a visit he made
to New York. He takes a dim view of QE2, the second wave of the Federal
Reserve's plan to buy more Treasuries. The intention is to push down rates to
spur the economy, but that hasn't worked out yet as yields have backed up. ??

As
Katsenelson sees it, the Fed is trying to push investors into riskier assets
such as higher-yielding bonds or stocks: "For a lot of investors, it's a
game they can't win–buying an overvalued asset and hoping it will
appreciate." ??He isn't buying much himself these days. Katsenelson has a
35% cash position, in part because "the market is not cheap." He's
also concerned about China, where in his view the demand for commodities is
"not sustainable." ??So what kinds of stocks suit his fancy these
days? ??"I want to own companies that have a lot of cash," he says.
??That includes Pfizer (ticker: PFE), the pharmaceutical giant
whose shares have been a big disappointment (For more on Pfizer, see "Feeling Better About Pfizer"). At 17 and
change last week, the shares fetched about 7.4 times the $2.29 share analysts
expect the company to earn next year. Yes, it has impending pipeline problems,
in particular Lipitor, the blockbuster cholesterol drug. But he sees very
little downside given the company's financial strength and the steps it's
taking to develop new drugs. ??Another of his favorites is National Grid (NGG), a U.K.-based company that
delivers gas and electricity to customers, including some in Long Island and
New England. It has the added protection of a 4.7% dividend yield.  

[Data
services often misquote dividend yields of British companies as they usually
pay two unequal dividends.  Actual dividend yield of NGG is north of 6%]

I
was on the Gabe Wisdom radio show on Monday; here is a podcast. 

Video
with TheStreet.com

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of  upcoming The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here.

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