Sign in
Become a MarketWatch member today
Weekend Investor
Feb. 18, 2011, 6:27 p.m. EST
View all Weekend Investor "º
"¹ Previous Column
The risk of Egypt and Mideast stocks, post Mubarak
First Take "º
Smartphone index fund, gimmick or smart?
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” You don't have to go far to see higher prices in the U.S.: Just stop at the gas station or the grocery store. And while the government's core inflation figure released Thursday is tame, up just 1% in the 12 months through January, the fact that Americans are doling out considerably more for basic energy and food disturbs many stock investors.
Their concern is understandable. Inflation destroys consumers' buying power and depresses corporate earnings. In that hostile climate, the U.S. dollar loses clout and so-called hard assets gain favor "” especially gold, the ultimate inflation hedge.
There's an inflation tug-of-war in the U.S. as consumers are paying more for goods such as gasoline, but less for services.
Yet stocks can be a strong inflation-fighter, too. So it was noteworthy when Richard Russell, editor of the widely watched investment newsletter Dow Theory Letters and a confirmed gold bug and stock bear, told subscribers in late January that they should buy U.S. stocks.
Not all U.S. stocks; Russell wasn't about to do a complete reversal, even after missing the now almost two-year-long rally.
The veteran market observer simply recommended that investors own the 30 high-quality, large-cap stocks in the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,391, +73.11, +0.59%) "” mainstays of the global economy including International Business Machines /quotes/comstock/13*!ibm/quotes/nls/ibm (IBM 164.84, +0.60, +0.37%) , Caterpillar Inc. /quotes/comstock/13*!cat/quotes/nls/cat (CAT 105.86, +2.50, +2.42%) and Chevron Corp. /quotes/comstock/13*!cvx/quotes/nls/cvx (CVX 98.72, +1.55, +1.60%) "” to hedge against inflation and the ravages of what he says is a slowly but steadily weaker U.S. dollar. Read more: Silver futures rally to 30-year high.
"When extreme currency devaluation occurs, stocks (the bluest of dividend-paying blue chips) can become inflation hedges," Russell noted. "That's exactly what I think we've been seeing in the stock market as the Dow pushes higher."
The best way to buy the Dow, Russell said, is through SPDR Dow Jones Industrial Average ETF /quotes/comstock/13*!dia/quotes/nls/dia (DIA 123.60, +0.44, +0.36%) , more commonly known by its ticker as the Dow Diamonds. Russell advised taking a "very limited position" in this concentrated ETF, making sure to avoid the broad U.S. market, "rather than depend solely on gold (and silver) as hedges against the fading dollar." Read more: Gold bugs about to get squashed.
Russell's acerbic views may not be mainstream, but in fact he is echoing a vocal chorus of Wall Street strategists who are convinced this is the year that large-cap stocks finally take market leadership from small-cap and midcap rivals. Moreover, they predict the U.S. will be center stage for this show.
/quotes/comstock/13*!dia/quotes/nls/dia DIA 123.60, +0.44, +0.36% /quotes/comstock/13*!sly/quotes/nls/sly SLY 70.04, +0.01, +0.01% /quotes/comstock/13*!gld/quotes/nls/gld GLD 135.41, +0.37, +0.27% Large-caps top small-caps and gold YTD.
"The Great Rotation" is what Bank of America Merrill Lynch analysts have dubbed this major shift. In an early February report, the firm noted that investors globally have been trading out of gold, bonds, emerging market stocks and other 2010 winners. Buyers instead are beginning to favor developed-market large-cap stocks that are benefitting, the analysts noted, from "a normalization of economic growth, interest rates and asset allocation."
Moreover, large-cap stocks are better able to absorb inflationary pressures than smaller companies. Large firms typically have pricing power and can pass along higher costs to customers. Many big U.S. companies also carry low debt as a percentage of total equity, which provides flexibility when the economy heats to a point where interest rates rise and borrowing is more expensive.
"?Some Americans do seem to understand that the best stocks may serve as a safe haven.'
Richard Russell
Smaller companies, in contrast, tend to have less room to maneuver on pricing and are constrained by higher borrowing costs and tighter access to money "” conditions that many economists see developing in the second half of the year and continuing into 2012, when they expect the Fed to take away the easy-money punch bowl.
The Dow components fit the large-cap stock theme perfectly. The average company in the price-weighted index has a market value of more than $135 billion.
Page 1Page 2 Add Comment › · Recommend (1) · Post: Alert Email Print More Weekend Investor Feb. 11, 2011 The risk of Egypt and Mideast stocks, post Mubarak Feb. 4, 2011 Be a smart buyer of Facebook, other hot shares Jan. 28, 2011 How to profit from consumers in emerging markets Jan. 21, 2011 Three big tech stocks that demand caution Jan. 14, 2011 Why investors shouldn't break with muni bonds Explore related topics Gas/Utilities Computer Hardware Dow Jones Industrial Average International Business Machines Caterpillar Inc Chevron Corp Comments Screener First Take Smartphone index fund, gimmick or smart?An exchange-traded index fund that compiles all the smartphone-related companies may seem like a gimmick, but it's not such a bad idea.
7:08 p.m. Feb. 18, 2011
Most Popular Most readMost commented Top 10 MarketWatch stories Feb. 14 -18 Inflation-fighting stocks that gold bugs can love Here comes the dot-com boom 2.0 U.S. stocks climb, extending weekly gains to three 2011 Buick Regal CXL turbo The best laid plans ... Good excuse to destroy the unions U.S. stocks climb, extending weekly gains to three Oil rises on week; Mideast supply risks in focus Silver's still looking good Find a Broker Partner Center » MarketWatch's Latest Tweets"Feds end Mozilo inquiry without filing charges against ex-Countrywide chief: report http://on.mktw.net/eu2euq" 11:00 p.m. EST, Feb. 18, 2011 from MarketWatch
"U.S. stocks rise for third straight day, ending week up 1% http://on.mktw.net/ikkvrD" 4:02 p.m. EST, Feb. 18, 2011 from MarketWatch
"Intel to build $5 billion chip factory, hire 4,000 workers in Arizona http://on.mktw.net/eLxTeS" 3:26 p.m. EST, Feb. 18, 2011 from MarketWatch
"Dow industrials up 5 points early Friday; index evenly divided between winners and losers http://on.mktw.net/f65jDX" 9:48 a.m. EST, Feb. 18, 2011 from MarketWatch
"Bernanke defends Fed's so-called QE2 at G-20 gathering in Paris http://on.mktw.net/dJLAl6" 8:06 a.m. EST, Feb. 18, 2011 from MarketWatch
/quotes/comstock/10w!i:dji/delayed Dow Jones Industrial Average (DJIA) /marketstate/country/US The market is open6:51:51 am The market is closed6:51:51 am 12,391 Change +73.11 +0.59% Volume 230.04m Real time quotes var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); Add to portfolio DJIA Find a Broker Create alert /quotes/comstock/13*!ibm/quotes/nls/ibm International Business... (IBM) /marketstate/country/US The market is open6:51:51 am The market is closed6:51:51 am $ 164.84 Change +0.60 +0.37% Volume 4.25m Real time quotes var embeddedchart325606332Chart = new EmbeddedChart('#embeddedchart325606332', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:IBM'); jQuery.data($('#embeddedchart325606332').get(0), 'embeddedchart', embeddedchart325606332Chart); Add to portfolio IBM Find a Broker Create alert /quotes/comstock/13*!cat/quotes/nls/cat Caterpillar Inc (CAT) /marketstate/country/US The market is open6:51:51 am The market is closed6:51:51 am $ 105.86 Change +2.50 +2.42% Volume 8.75m Real time quotes var embeddedchart728890906Chart = new EmbeddedChart('#embeddedchart728890906', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:CAT'); jQuery.data($('#embeddedchart728890906').get(0), 'embeddedchart', embeddedchart728890906Chart); Add to portfolio CAT Find a Broker Create alert /quotes/comstock/13*!cvx/quotes/nls/cvx Chevron Corp (CVX) /marketstate/country/US The market is open6:51:51 am The market is closed6:51:51 am $ 98.72 Change +1.55 +1.60% Volume 8.86m Real time quotes var embeddedchart1287531741Chart = new EmbeddedChart('#embeddedchart1287531741', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:CVX'); jQuery.data($('#embeddedchart1287531741').get(0), 'embeddedchart', embeddedchart1287531741Chart); Add to portfolio CVX Find a Broker Create alert /quotes/comstock/13*!dia/quotes/nls/dia SPDR Dow Jones Industrial... (DIA) /marketstate/country/US The market is open6:51:51 am The market is closed6:51:51 am $ 123.60 Change +0.44 +0.36% Volume 6.32m Real time quotes var embeddedchart1085121444Chart = new EmbeddedChart('#embeddedchart1085121444', NormalChartStyleNoDecimals, 190, 90, '1dy', '5mi', null, null, null, 'US:DIA'); jQuery.data($('#embeddedchart1085121444').get(0), 'embeddedchart', embeddedchart1085121444Chart); Add to portfolio DIA Find a Broker Create alert Featured Commentary » Next: Myra Saefong's Commodities CornerCommodities Corner
Silver's still looking good
Next: John Dvorak's Second OpinionDigital Dvorak
IBM's Watson is just a super search engine
Next: Jennifer Waters' Consumer ConfidentialConsumer Confidential
How to spot debt-collection scams
Next: Howard GoldNo-Nonsense Investing
Here comes the dot-com boom 2.0
Next: Jon Friedman's Media WebMedia Web
Margaret Brennan: Bloomberg TV's force
Next: Rex NuttingMoney and Power
Good excuse to destroy the unions
Next: Tomi Kilgore
B. of A. behaving like a rally is coming
Next: Therese Poletti's Tech TalesTech Tales
Apple and Google face subscription challenges
Next: David CallawayEditor's View
NYSE deal ends protectionist spree
Next: Peter BrimelowWall Street Irregulars
Gold and Sarah Palin
Next: Jeff ReevesStrength in Numbers
Five tips for picking winning stocks
Next: Robert Powell's Your PortfolioYour Portfolio
China's new role on investing stage
More BigCharts Virtual Stock Exchange WSJ Asia WSJ Europe WSJ Americas WSJ Chinese Financial News Online SEARCH 6:51 AM EST February 19, 2011 /marketstate/country/us New York Closed /marketstate/country/uk London Closed /marketstate/country/jp Tokyo Closed /marketstate/country/us /marketstate/country/uk /marketstate/country/jp View All Latest News /news/latest8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2798096:00aU.S. stock market looks to maintain uptrend
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:27980812:01aThe week's 10 best Personal Finance stories
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:27980712:01a2011 Buick Regal CXL turbo
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:27980410:23pTop 10 MarketWatch stories Feb. 14 -18
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2798069:09pTime Inc. plays key role at Time Warner
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2798028:23pGa., Calif. banks fail, bringing '11 total to 21
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2798018:09pNapa, Calif. bank is 21st U.S. failure of the year
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2798008:02pTax tips: File online safely, hire a pro and more
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797997:22pFiling Taxes Online: Is It Safe?
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797987:16pStocks in focus Tuesday: Wal-Mart, H-P
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797977:07pSmartphone index fund, gimmick or smart?
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797966:31pNYSE, Brocade shares higher in late trade
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797946:27pAfter the Bell from MarketWatch Radio Network
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797936:27pInflation-fighting stocks that gold bugs can love
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797916:24pChile stocks fall, peso up after rate hike
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797896:10pGold is flying, but this metal stock is sinking
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797856:09pSpringfield, Ga. bank is 20th failure of 2011
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797785:38pSmartphone fund is latest ETF gimmick
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797834:39pU.S. week ahead: Mideast trouble watch continues
8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2797844:31pClosing Bell from MarketWatch Radio Network
Loading more headlines... dow /quotes/comstock/10w!i:dji/delayed 12,391 73.11 0.59% nasdaq /quotes/comstock/10y!i:comp 2,834 2.37 0.08% s&p 500 /quotes/comstock/21z!i1:in\x 1,343 2.58 0.19% Kiosk 1289876400000 1289880000000Asia
Korean split South Korean shares have put in one of the worst performances in Asia so far this month, despite Friday's gains, and analysts are divided on their outlooks. 128979 1268356500000 1268413200000Political Watch
Another Democrat retiring Senate Democrats have one more seat to defend in 2012 now that Jeff Bingaman of New Mexico is not running again, and the race could be a tough one. 129125 1240992000000 1272528000000Commentary
REX NUTTING Good excuse to destroy unions Republican governors and legislators are taking advantage of the recession to try to put workers back in their place. 128973 1266314400000 1266314400000Commentary
NYSE deal tears down wall Sale to Deutsche Börse spells end of financial-crisis-era protectionism, argues David Callaway. "¢ Ex-NYSE Chief Dick Grasso defends term "¢ Weidner: Selling to Germans a crime (WSJ.com) 128829 1238875200000 1270411200000Commodities Corner
MYRA P. SAEFONG Silver's still looking good After an impressive rally lifted silver's value by nearly 70% in the past six months, it's normal to wonder whether its run is built to last. 129097 1247594400000 1247644800000The Economy
Inflation, pay, Philly Fed The week's data showed commodity prices still on the upswing and trickling into consumer prices, weekly earnings slipping, and things looking up in Philly. 129076 1252593000000 1252593900000Health Care
Questioning cholesterol Greater levels of the so-called good cholesterol may be less important than how well it can remove the bad cholesterol from your arteries. 128832 1242676800000 1274212800000Media
JoN FRIEDMAn's Media Web Bloomberg TV's force Anchor Margaret Brennan, who joined two years ago from CNBC, is Bloomberg TV's best hope to become a force in cable-television news. 129098 1245715200000 1277337600000Real Estate
Grow old along with me More homes are being built with attractive 'universal design' features that will help boomers stay in them, even as they get older, reports Amy Hoak. /conga/kiosk/real_estate.html 128958 1251763200000 1251763200000Slide Show
Westminster dog show Among U.S. sporting events, only the Kentucky Derby has enjoyed a longer continuous run than this canine event. "¢ Meet Hickory "” year's top dog /conga/kiosk/wildcard1.html 129022 MarketWatch.com Site Index Topics Help Feedback Newsroom Roster Media Archive Premium Products Mobile Podcasts RSS MarketWatch on Facebook MarketWatch on Twitter Company Info Code of Conduct Corrections Advertising Media Kit Advertise Locally License our Content WSJ.com Barron's Online BigCharts Virtual Stock Exchange All Things Digital MarketWatch Community Financial News Online WSJ.com Small Business FINS: Finance, IT jobs, Sales jobsCopyright © 2011 MarketWatch, Inc. All rights reserved. By using this site, you agree to the Terms of Service and Privacy Policy.
Intraday Data provided by Thomson Reuters and subject to terms of use. Historical and current end-of-day data provided by Thomson Reuters. Intraday data delayed per exchange requirements. Dow Jones Indexes (SM) from Dow Jones & Company, Inc. All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More information on NASDAQ traded symbols and their current financial status. Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Dow Jones Indexes(SM) from Dow Jones & Company, Inc. SEHK intraday data is provided by Comstock and is at least 60-minutes delayed. All quotes are in local exchange time.
MarketsMarkets Data is loading... QuotesQuotes Data is loading... Read Full Article »