Feb. 5, 2008 (Investor's Business Daily delivered by Newstex)--The market in January punished most major sectors as much as the blitzing New York Giants pummeled the New England Patriots in the Super Bowl.
Gold funds were the one sector to gain ground last month. The group benefited from investor fears of inflation and from a sell-off in stocks generally. Gold funds surged 7.62% on average in 2008's kick-off month.
The Federal Reserve's interest rate cuts told investors the central bank is more worried about recession than about fighting inflation, said Thomas Winmill, manager of $270 million Midas Fund (MIDSX). "That doesn't bode well for the U.S. dollar," Winmill said. "Neither does the $150 billion fiscal stimulus package passed by Congress."
Winmill's outlook for gold is bullish so long as the U.S. has a negative real interest rate, with inflation topping short-term Treasury rates.
Investors will flee more to gold if a U.S. recession hurts commodity prices more than demand from China and India can stoke them.
Kinross Gold KGC was a top performer for his fund. It soared 20%. "They're expecting 30% production growth in 2008," Winmill said.
REITs Rally
Among other sectors, real estate funds lost the least ground. Their setback averaged 1.37%. The last time REIT funds led all sectors was in August. Then they built a 4.46% gain on average.
"After August, the real estate sector got oversold," said Richard Imperiale, manager of $40 million Forward Progressive Real Estate Fund FFREX. The subprime lending mess was a key contributor to investor wariness.
"The credit crunch hurt because the sector began discounting the notion that large, highly leveraged transactions could no longer be financed as a result of fallout from the subprime lending problems," Imperiale said. "There was also growing anxiety over whether capital would be more expensive because of slowing GDP."
But the Fed's rate cuts fueled a REIT fund rally. "When the Fed lowered the cost of capital, it sent a message that the margin between the cost of capital and commercial property values had become attractively wide," Imperiale said. "Buyers rushed in. That erased much of what had been a big loss for the sector." REIT funds were down 9.34% from Jan. 1 through Jan. 17.
But not all REIT segments will benefit equally from lower cost of capital, Imperiale added. Markets where demand tops supply will continue to outperform.
Some types of REITs will benefit more, too. Warehouse and logistic facilities in transportation should stay relatively strong even if the U.S. economy cools, Imperiale said. In turn, that will help nearby flexible mixed-use office REITs.
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A still healthy economy, fueling business travel, helped make Hospitality Properties Trust (NYSE:HPT) HPT a top performer for his fund last month. The firm owns hotels, which it leases to operators like Marriott. It gained 5.36% in January.
In contrast, apartment REITs already are being hurt by residential foreclosures, which flood the market with more rental housing units.
Retail REITs also are showing signs of a slowdown. "We appear to be in the early stages of consumer retrenchment," Imperiale said.
Financial services lost 2.45% on average last month. The group had finished in the middle or back of the sectors pack every month since September 2006.
Investors have begun to distinguish which banks look least likely to spring new leaks from the subprime lending meltdown from those that are still in danger, said Lisa Welch, co-manager of $1.1 billion John Hancock Regional Bank Fund FRBFX.
That sharper view helped drive up super regional bank BB&T (NYSE:BBT) BBT 18% last month.
On The Outs
On the other hand, investors sold off life insurers, asset managers, investment banks and credit card companies that had not clarified their exposure to the subprime crisis, said Roger Hamilton, co-manager of $610 million Hancock Financial Services FIDAX.
Investors were relatively supportive of exchanges, and trust and custody banks. Hamilton says he's bullish on that group. He also likes the outlook for insurers and asset managers. "Their valuations are down," he said. "And they don't borrow to invest in their portfolios."
The crucial science-tech sector was hammered in January. Tech funds averaged a 12.94% loss, the worst showing by any sector.
Tech was dogged by fears of global economic slowdowns, said Richard Parower, lead manager of $362 million Seligman Global Technology Fund SHGTX.
"Earnings were good in some segments, mixed in others," Parower said. "With the macro uncertainties, people who made money last year took some profits this year."
Generally, software and big hardware firms did well in January, helped by overseas sales. Software giant Symantec (NASDAQ:SYMC) SYMC gained 11%.
Originally published in the February 5, 2008 version of Investor's Business Daily.
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