Portfolio Investor: Clark Bullish on Energy, Materials

By Murray Coleman

Joe Clark says he views investing as a game of inches.

"Understanding that the long-term game plan in investing is to stretch out incomes to last a lifetime," said the Anderson, Ind.-based advisor, "we like to play within the lines."

And that means taking what the market gives, remaining flexible and accepting change as a given, he adds.

"We don't believe financial success is a matter of being in or out of the market," said Clark, managing partner at Financial Enhancement Group LLC. "The world changes in a way that nobody can predict where money should be at any given point in time. Given that, we always keep a certain percentage of our clients' assets invested in a liquid fashion."

Right now, the firm holds about 71% of its client assets in stocks, 19% in fixed income and 10% in cash. "The amount we have in liquid assets, basically money markets, is about 50% higher than normal," Clark said.

That's due to the fact that his 11-person team of advisors and analysts consider U.S. Treasuries overvalued right now. "We're working our way into corporate bonds," Clark said.

Primarily, FEG is using an exchange-traded fund, the iShares iBoxx Investment Grade Corporate Bond (NYSE: LQD), to gain more exposure to investment-grade corporates. "The United States economy is much stronger than people believe and U.S. corporate balance sheets are still extremely strong. And the default rates on corporate bonds are very low," Clark said.

Less Is More

The credit spread between investment-grade bonds and Treasuries is running about 2% now, he says. That's about a quarter more than historical averages. "When you think about a half percentage point difference in fixed income, that's huge," Clark said. "In our opinion, we're finding much better deals right now in corporate issues."

He promises to monitor the accounts for each of his firm's 700 families on a weekly basis. Clark prefers ETFs and in some cases, individual stocks. His last big move was to put cash to work in late January into basic materials iShares Dow Jones U.S. Basic Materials (NYSE: IYM) and SPDR S&P Oil & Gas Equipment & Services (AMEX: XES).

"We use both technical and fundamental analysis. But I'm a demographic specialist, which lets us augment our company level research," Clark said.

For example, the peak of the baby boomers were born between 1957 and 1961. The average American buys their largest home between 42 and 44 years old. "So by knowing the age of the population, you can see when the greatest demand should occur for home sales," Clark said.

He had positions in iShares Dow Jones U.S. Real Estate (NYSE: IYR) in early 2007. "We knew that housing should've topped out in 2006 based on those demographics because the average American homeowner had gone past the age of 44. So the demographics suggested demand for housing should move in a negative manner. So as soon as IYR had any negative technical breakdown, we sold it."

After the ETF's price peaked last May, the firm sold its positions. And that turned out to be months ahead of the mortgage meltdown.

Currently, demographics are suggesting to Clark that software is hot. "Regardless of what the other data suggests, people are still enthusiastic about gadgets," he said. "The middle class has a lot of discretionary income, much more than a lot of analysts are taking into account. And we think a lot of the upcoming tax stimulus package will wind up in handheld phones, Apple computers and flat-screen televisions."

To take advantage of that trend, he's putting clients into iShares S&P North American Tech-Software (NYSE: IGV). Its two largest holdings are Oracle and Microsoft. "We use IGV to buy software used to power all of the gadgets that make American consumers happy people," Clark said.

While he sees a significant demographic change is coming, his view is that a correction remains 18 months to two years away. "Wall Street is in a depression, but main street companies are doing fine. Earnings numbers are strong, but financial companies from investment banks to brokerage firms are really down," Clark said. "We are in a bifurcated economy these days."

If the dollar holds tight or goes up, he's expecting to reduce his positions in IYM and XES to a market-neutral weighting. That's the same as the S&P 500, which is around 12% exposure to energy with about a third in equipment. Now, he's holding about double that weighting in energy through XES.

On the materials side, Clark has about a double weighting as the S&P 500. About 3.6% of the blue chip benchmark is in that area now; his clients hold a total of about 6% through IYM and iShares S&P Latin America 40 Index (NYSE: ILF).

"Latin America holds a lot of materials, which we count in our allocations to the sector," Clark said.

If the Fed says it'll keep cutting rates, those allocation levels will remain about the same. But if it appears after Wednesday the Fed plans to turn its attention to inflation, that could destabilize the value of the dollar. And Clark would be inclined to sell out of IYM.

But in either case, he's sticking with ILF. "We'd actually increase the position if given the opportunity," Clark said.

Comments

[stockczar]

US manufacturing economy stalling per today's news. "Manufacturing activity in the New York area deteriorated slightly in May, the New York Federal Reserve Bank said Thursday. The bank's Empire State Manufacturing index fell to negative 3.2 in May from 0.6 in April. This is the third month in the last four that the index has been negative. Readings below zero indicate contraction. The report was weaker than expected. Economists were expecting to be essentially flat in April. "

Expect Basic Materials IYM to pull back. Higher costs for Basic Materials companies due to energy price spike matched with inability to raise prices in a near-recessionary environment.