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Smith's outlook for 1999
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January 18, 1999: 2:17 p.m. ET
Orbitex' Chief Investment Officer offers investment strategies, sees growth
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NEW YORK (CNNfn) - CNNfn spoke with Orbitex Management's Chief Investment Officer Courtney Smith about basic investment strategies, the pros and cons of investing Social Security funds in the U.S. stock market and potential growth areas in the new year.
Here are excerpts from his "In the Game" interview:
JOHN DEFTERIOS, CNNfn ANCHOR: One of the really personal financial questions that come in to CNNfn, particularly our web site is how do you change the mix of a portfolio to reflect what we're seeing in international markets and the local growth we're seeing here in the US economy. Have you changed the mix of your portfolio?
COURTNEY SMITH, CHIEF INVESTMENT OFFICER, ORBITEX MANAGEMENT: No, I think that you can stay invested in U.S. companies and that gives you exposure outside. For example as we discussed earlier Coca-Cola (KO)is really an offshore company. Exxon (XON): is that really an American company? No, it's really a global company.
So to me making sure that you have a good mutual fund here or a good diversified portfolio can give you a lot of exposure without having to get into worries about currencies and things like that. Let the pros manage it.
DEFTERIOS: In the 401(k), there's been a lot of criticism in this country that it's limited to $9500 or about $10,000 a year right now. Senator William Roth wants to open that up. Do you support such a measure? Obviously, it's good for your job because money comes into the market. So, that's one bias here. But in the overall idea, in terms of getting this retirement package put to bed, it's a wise idea, it seems.
SMITH: I think an excellent idea. Forgetting the fact they manage mutual funds at Orbitex, the fact is that anything we can do to encourage people's savings and to reduce taxes on that savings is a good thing for the United States and a good thing for the globe as well. Anything we can do to help people save for their retirement is a good thing. That money then gets recycled into other projects, it creates job. It's a win-win situation for really everybody combined.
DEBORAH MARCHINI, CNNfn ANCHOR: A win-win situation for Uncle Sam? It cuts into tax revenue.
SMITH: It's not good from a short term perspective, but anything that raises the wealth of the American people is a good thing for Uncle Sam, because he's going to get his tax dollars another way.
DEFTERIOS: We haven't heard lately about the Social Security plan to have 5 percent of your assets set aside in to the stock market. That wouldn't be too speculative in terms of having personal investors or small investors jumping in, trying to flip their stocks for their Social Security fund.
SMITH: Yes. I think if we had a system where we had privatized pension funds, I would like that, and we know that stocks over the long run outperformed other investments. So from that perspective I like it.
What makes me nervous is the concept of having the Social Security Administration investing in stocks, because that's a de facto nationalization of companies and I don't know that the Social Security Administration would act as an investor in the way the rest of us would act as an investor.
MARCHINI: It would also be a thundering elephant in the market as big and liquid as they are, would it not?
SMITH: Absolutely right. I would be very nervous about them doing it. That's why I would rather have it privatized where you have people that are looking out for the shareholders representing them.
MARCHINI: Let me express a little skepticism here. This plan to invest, because you noted that the returns historically on stocks are higher, but of course there's no guarantees. Is there some plan for bailing out Social Security by assuming higher returns on a portion of the money.
SMITH: It may be, but one would have to be a cynic to think that.
MARCHINI: I guess we know where that leaves me. You have some question. You think it's a good idea as long as the money management is put into private hands.
SMITH: Exactly. I would like to see them privatize it because right now the Social Security system is really a Ponzi scheme. It's not a true pension fund. It's not a self-funding fund. It's something that relies on tax dollars.
MARCHINI: But it's still backed by the full faith and credit of the United States Government. You can't call it a Ponzi scheme when Uncle Sam has pledged to borrow and has the authority to borrow to make good on the payments.
SMITH: But who pays that? I do.
MARCHINI: Future tax payers.
SMITH: Exactly right. That's why I say it's Ponzi scheme. The people that come in at the end have to pay for the people that are getting paid now. So, it's an untenable situation.
MARCHINI: If we have private management of Social Security though, isn't that just handing a big fat fee to Wall Street?
SMITH: There would be a big fat fee to Wall Street and there is a conflict of interest there, obviously. Wall Street's done a better job.
Okay, private pensions -- private pension plans and dominant plans, they've all done a better job than Social Security at protecting the interest of their share holders or of their pensioners.
DEFTERIOS: On this note, there's a question that comes in quite often here. How would you blend the perfect model for somebody who has $20,000 or $30,000 dollars in retirement, breakdown in terms of emerging markets, overseas markets, U.S. market right now.
SMITH: I think the best thing would be to focus on U.S. equities right now. It depends on how old they are. The older they are, the more I'd put into fixed income which I think represents good value. But if they're younger, I would heavily weight it towards equities.
I would put it all in domestic stocks right now. I think with some possible exposure, maybe 10 or 15 percent in European stocks, particularly the southern tier, the so called Club Med countries such as Italy, Spain, Portugal, I think they'll probable be the leaders going forward.
In terms of this technology revolution that's taking place right now, you've opted to say that, you know, healthcare looks like a safe area. Have you pulled out of technology entirely or are you staying with the core players?
SMITH: Oh, no. Actually, I think the technology is going to be one of the key areas. We're really presenting that as a core part of our Orbitex Growth Fund. We also have our Infotech Fund, which is devoted to technology.
So - I mean, we think the technology going forward is going to be - actually, we look at it as twin pillars, technology and healthcare, as being two very good, strong areas for the coming year.
DEFTERIOS: How about price-to-earnings ratios? I was reading a piece this weekend in the Financial Times, I think it was, saying that we have to throw away the old models, that these price-to-earnings valuations really don't apply to this market because we're really growing at a much faster pace. So 45-, 50-times earnings is more like this market. Is that just nonsense?
SMITH: Well, I hate to be a two-handed economist. I can argue both ways. Number one, value is value. The intrinsic value of a company has to be worth something.
But when you have the lowest inflation we've had since the 1960s, when you have the highest cash flow we've ever seen in history, when we have debt-equity ratios lower than they've been since the 1950s, the quality of earnings on Wall Street are so good right now. With this kind of a non-inflationary environment, P/Es should be higher. There's an economic value that they should be higher.
MARCHINI: When you talk about low inflation and the like, my thoughts are bonds seem to be a good bet. What do you think?
SMITH: Absolutely. I think bonds will do well this year. Interest rates right now at, let's say, 5.1 percent on the long bond, represents good value. Inflation is one percent, perhaps even lower and is actually declining.
When we look at inflationary indicators over the last three months, they're actually lower than they are going -- for the last year. So the trend in inflation is lower. If we say inflation is 1 percent and with the bond, it's at 5.10, that's a 4.10 percent after- inflation adjusted yield. That is at the high end of ranges. That's good value.
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