Risk/Return on Wall Street This Week

Risk/Return on Wall Street This Week

China Photos/Getty Images

Gold Is Just Taking a Breather
Gold lost much of its glitter late last week, plunging 9.3 percent Thursday and Friday in the biggest selloff seen since 1983.

Look for a rebound before long, however. Sure, $1,639.80 an ounce is a long way south of the early September high of $1,923.70. But what’s the alternative safe haven? Cash may be king, but gold gleams in comparison to dollars or – ugh – euros.

“As long as there is this global sovereign fiscal irresponsibility to contend with, gold is going to look very attractive,” says Phil Streible, senior markets strategist at MF Global, a financial derivatives broker-dealer. That nasty selloff had more to do with what was happening in other markets and investors needing to raise cash quickly to meet marginal calls, he adds.

In a crisis, investors want to park their money in investments they can see, that are portable, that have been around for millennia. That means gold. That’s one reason commodity analysts expect gold could be back to $1,850 by year-end.

Is China Weakening?
Could the China investment story – one of the biggest themes of the year, if not the decade – finally be faltering? A slowdown is only to be expected, although GDP is still growing at an annual rate of more than 9 percent. But the news last week that manufacturing activity may be contracting may well be enough to drive nervous investors to reconsider their decision to bet on U.S. companies that get a big chunk of revenues or profits from Chinese markets.

Yum Brands (YUM) has done so well pitching Kentucky Fried Chicken to residents of Chinese urban areas that it gets a third of its revenues from the country. Wynn Resorts (WYNN) relies on the affluent Chinese who flock to the gaming tables in its Macau casinos for about 2/3 of its revenues. The Chinese obsession with cellphones – a key fashion accessory, often replaced with the newest, trendiest model – means a host of U.S. companies with wireless technology expertise like Qualcomm (QCOM) and Broadcom (BRCM)  rely on China for a quarter of their revenues.

Many more companies have pinned growth hopes on China. While they could curb their expansion plans, so far they’ve shown no signs of flinching at the prospect of a China slowdown. Starbucks (SBUX) plans to triple the number of Chinese retail outlets in the next four years, a company official announced earlier this month. These companies may be right in the long-term view, but investors who want to go along for the ride should be prepared for it to be a rocky one.

Ominous Indicator for Banks
We won’t see how bad the summer was for Goldman Sachs (GS) and Morgan Stanley (MS) until mid-October, but we got a taste of how bad it might be from last week’s earnings report by Jefferies Group (JEF). The news is ominous: Jefferies’ bond-trading revenues plunged nearly 80 percent in the three months ended Aug. 31, to $33.1 million; quarterly profits of 10 cents a share were half what Wall Street had been expecting.

Jefferies might be a midsized firm, but it’s feisty –and it has been cherry-picking teams of star bankers and traders from bigger institutions. If it is struggling, that’s bad news for the rest of Wall Street. Goldman Sachs, for instance, still earns an outsize chunk of its revenues and profits from trading, including market-making. Even if investment banking and asset management were booming, it would take a lot to offset a bad trading environment and for now, there’s nowhere to hide. Analysts have already slashed their estimates – today’s consensus that Goldman will report a quarterly profit of $1.25 a share is 66 percent lower than it was three months ago. Some have turned more bearish still: Roger Freeman of Barclays Capital predicts Goldman will post a loss in the current quarter for only the second time in its history. Brace yourself for more bad news from this sector.

The Good News

Not everyone has spent the summer and the first few weeks of September bemoaning their losses. Hedge funds, for instance, reported lower redemption levels in September than in the last two years, according to data from hedge fund administrator GlobeOp, as reported by CNBC. And while hedge funds aren’t immune from the market turbulence, average declines as of the end of August still were a few percentage points smaller than those of major market indexes. Over at Harvard University, hedge fund returns contributed to an astonishing 21 percent gain in the university’s endowment in the year ended June 30.

True, most of us can’t replicate those returns – most top-tier hedge funds are inaccessible to retail investors, even affluent ones. But some of the year’s best-performing mutual funds have been able to stay in the black. Virtus Small Cap Sustainable Growth, for instance, has given investors a year-to-date return of 8.07 percent with lesser-known stocks like PriceSmart (PSMT) -- up 79.5 percent so far this year -- and Cohen & Steers (CNS) -- up 22.2 percent. Maybe the less buzz around a stock, the better it does.

Netflix: Are Two Better than One?
Netflix (NFLX)  customers don’t like the plan to separate the DVD mail rental business from video streaming, requiring them to maintain two separate accounts. True, Netflix is finally winning some Wall Street fans, if only because the move shows that the company has a strategy going forward and because its stock price is half what it was at the beginning of the summer. UBS and Wedbush both upgraded the stock, helping Netflix hang on to some of the (remaining) value for shareholders, if not its customers.

But a discount-priced stock isn’t a terribly alluring investment these days, especially when a company is watching disgruntled subscribers head for the exits. When Netflix made its debut, it was one-of-a-kind, offering a service consumers couldn’t get enough of. Now, with giants like Amazon pushing their way into streaming, Dish Network announcing plans to stream Blockbuster content directly to TVs, and more rivals fidgeting in the wings, the market is fragmenting and Netflix’s business model has no competitive “moat.” Some analysts, like those at Webush, speculate a sale of the streaming business to Amazon is in the wings, but in what growth business would Netflix invest any sale proceeds? It may be time for remaining Netflix investors to follow subscribers to the door.