What the experts say

Large caps beckon; Muni bargains in California; Has housing hit bottom?

Large caps beckon

While small caps and medium caps have soared more than 70 percent in the past decade, large issues are “stuck at 1999 levels,” said Ben Levisohn in The Wall Street Journal. Some strategists say that’s a reason to start “tilting” back to large caps. “The time has come for the global gorillas,” says David Darst, chief investment strategist at Morgan Stanley Smith Barney. If history is any guide, sticking with the little guys is now a bad bet. Since 1926, small caps have typically been the biggest gainers in the first year of a bull market, but their returns settle into the single digits by year three. Today’s large caps, meanwhile, look extremely cheap relative to the small caps: The spread between valuations is now the highest on record.

Muni bargains in California

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Inflation fears and California’s “out-of-control” budget deficit have investors dumping the state’s municipal bonds in “droves,” said Kathy Kristof in Kiplinger’s Personal Finance. Such caution is appropriate. But as prices drop, yields on some issues have become pretty “irresistible.” Recently, 15-year general-obligation bonds yielded 5 percent to maturity—or the after-tax equivalent of 7.7 percent for non-residents in the top tax bracket. Of course, the health of different bonds “varies enormously.” General-obligation bonds, which the state can repay by raising taxes, seem safer bets than bonds tied to revenue generated by specific projects. And while longer-term bonds offer the best yields, it’s best to stick with bonds maturing within five years.

Has housing hit bottom?

Residential real estate might just be the “most hated asset class in the country,” said Dave Kansas in SmartMoney. Home prices in many places will get worse before they get better, and markets are still flooded with foreclosures and short sales. For what it’s worth, though, “smart people are buying real estate.” Having made $20 billion betting against housing during its glory days, hedge-fund manager John Paulson is now bullish: If you don’t own a home, buy one, he says, and if you already own property, buy more. Paulson’s idea is backed by some promising trends, but there are still a “zillion caveats,” including unemployment. “If the economy is not creating jobs,” the odds of a housing rebound tumble.

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