'Zeros' insure against plunge in stock market

The Ticker

October 15, 1997|By Julius Westheimer

AS THE STOCK market flips up and down -- mostly down -- each time Fed chief Alan Greenspan speaks, do you look for safety with good income?

Consider zero-coupon bonds. "Zeros" sell at a deep discount and accrue interest until maturity, when you are guaranteed to receive your bonds' face values.

"When Warren Buffett drops $2 billion into a completely uncharacteristic investment, it pays to take heed," says Personal Finance, October. "He chose zero-coupon bonds, one of the best hedges around. 'Zero' Treasuries are guaranteed by the U.S. and will soar in price if stocks nosedive."

Stocks could indeed fall if inflation returns. On Friday, the government reported that the producer price index -- prices to factories, farmers, and so on -- climbed a larger-than-expected 0.5 percent. The report sent stocks lower. And wages are rising 5 percent a year, after years of decline in inflation-adjusted levels; wage increases could signal a return of inflation.

Bond analyst Rajul Marthur observes, "The Federal Reserve is biased toward raising interest rates, possibly leading to a major Wall Street plunge from current high levels." When stocks plunge, "zeros" generally soar in price.

A word of caution: Don't dump all your cash or sell every stock to buy "zeros." Put about 20 percent of your cash in "zeros" as a hedge against a worst-case scenario.

Speaking of the municipal bond outlook, the new Forbes, Oct. 20, runs a bold headline: "Why Municipals Are a Compelling Buy -- Now."

In the article, Marilyn Cohen, president of a fixed-income management firm, says, "Bonds will be the next scarcity; the dearth will last a decade or more. That means higher bond prices. Buy your municipals now. Munis will no longer be just for coupon-clipping parents."

BOND BITS: "Bond investing is simple enough: Select bonds which yield the best return with a high degree of safety -- AA or AAA" ("The Intelligent Investor," by Benjamin Graham).

"Shrinking deficit has bondholders grinning. It's obvious: if the government borrows less, it will issue fewer bonds" (Barron's, Oct. 13).

"If bonds become very appealing, investors will sell stocks and buy bonds. That's one reason you should not ignore bonds, even if you don't want them" ("The Small Investor," by Jim Gard).

"The best strategy now is to mix maturities -- some short, some medium, some long" (Bloomberg Personal, November).

Pub Date: 10/15/97

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